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Are You Ready to Buy a Home?

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Ready to test your knowledge? You'll have ten multiple choice questions to answer. Click on each question to reveal the question and multiple choice answers. After you've completed answering all ten questions, click "Grade Me!" at the end of the quiz to see how you did.

Question 1

Before you start looking at houses, you should:

(A) Review your finances and establish a home-buying budget.	Correct Incorrect
(B) Shop for furniture and figure out how you want to decorate your new home.	Correct Incorrect
(C) Hire a real-estate agent to assist you in your home-buying process.	Correct Incorrect
(D) Figure out the neighborhood you want to live in.	Correct Incorrect

It is easy to get excited by the thought of buying a new home. A new home is the opportunity to start a new exciting part of your life in an area of town you´ve always wanted to live in and to decorate your new home in a style that suits your tastes. When you buy a home, it is also easy to become overwhelmed, which is why it helps to have a knowledgeable real estate agent help guide you through the purchase. But the most important question to ask before you take steps toward buying a home is figuring out how much home you can afford and setting a shopping budget. Once you´ve set a budget, than you can begin the home-shopping process.

Question 2

When you're ready to make an offer on a home, you should base your offer on:

(A) The seller's asking price.	Correct Incorrect
(B) What comparable homes have sold for in the area over the last six months.	Correct Incorrect
(C) Your realtor's recommendation.	Correct Incorrect
(D) What your friends and family recommend.	Correct Incorrect

When buying a home, the most important factor is understanding the home´s real market value and making your offer based on that. The best way to do that is to determine what other comparable homes in the same general vicinity of your target home have sold for recently. Look at barometers such as cost per square foot as a baseline, but then make adjustments based on other aspects of the property, such as location, lot size, and features of the home such as flooring, swimming pool, etc. Those factors can move the home value up or down. Also consider whether you´re going to have to put more money into the home via improvements that will bring the home up to today´s living standards. Your realtor or family and friends can help you with the legwork, but make sure you understand the home´s underlying value before making your offer.

Question 3

If you've worked with a specific lender and have a tentative commitment for mortgage funding based on a review of your income, asset and debt documentation, you've been:

(A) Pre-approved for a loan.	Correct Incorrect
(B) Pre-qualified for a loan.	Correct Incorrect
(C) Put through the ringer.	Correct Incorrect
(D) Notarized for a loan.	Correct Incorrect

Getting "pre-qualified" for a mortgage is typically the first step in the mortgage process and the easiest to get through as it involves having your lender take a look at your finances, including income, debt and other assets and letting you know the size of mortgage for which you would qualify. Getting "pre-approved" requires you to formally fill-out a mortgage application, provide documentation of income and give permission for the lender to pull a full credit report so that they can evaluate your finances and credit history in detail. If you´ve been pre-approved, the lender will provide you with a written commitment for an exact maximum loan amount. Getting pre-approved puts you in a better position to have your offer accepted by the home seller as your offer will not be contingent on you being approved for financing.

Question 4

When saving to buy a home, your savings plan should account for the following:

(A) 10-20% of the purchase price as a down payment.	Correct Incorrect
(B) 3-6% of the purchase price as closing costs.	Correct Incorrect
(C) 6% of the purchase price as the realtor's commission.	Correct Incorrect
(D) Both A and C	Correct Incorrect
(E) Both A and B	Correct Incorrect

When buying a home, you´ll be expected to have a sizable downpayment to put down on the home and need to be prepared to the closing costs associated with your mortgage loan. Realtor commissions are paid by the seller and are not the buyer´s responsibility.

Question 5

When researching the price of the home you'll be able to afford, which of the following will be a contributing factor?

(A) Your "loan-to-value" ratio.	Correct Incorrect
(B) Your "debt-to-income" ratio.	Correct Incorrect
(C) Your housing ratio.	Correct Incorrect
(D) All of the above.	Correct Incorrect

Mortgage lenders will focus on a number of different ´ratios´ in taking you through the mortgage approval process. Your ´debt-to-income´ ratio is all of your monthly debt payments divided by your gross monthly income, while your ´housing´ ratio only looks at your total monthly housing expenses, divided by your income. Your housing expenses include mortgage principal, interest payments, property taxes, insurance and any homeowners association fees. Finally, your ´loan-to-value´ ratio represents the outstanding mortgage balance divided by the appraised value of the home. Typically, lenders see high LTVs as riskier loans.

Question 6

In order to qualify for a lender's best interest rates on a mortgage, your FICO score should be at least:

(A) 760	Correct Incorrect
(B) 700	Correct Incorrect
(C) 640	Correct Incorrect
(D) 575	Correct Incorrect

According to the credit bureau Experian, while basic FICO scores range from 300 to 850, credit scores in the range of 740 to 799 are considered very good and should qualify you for the best rates of most lenders. Scores above 800 are considered exceptional, while scores between 670 and 739 are typically considered acceptable. Anything below 669 typically labeled as a subprime borrower.

Question 7

Which of the following are you not responsible for paying as part of closing costs when you obtain a mortgage to purchase?

(A) Realtor fees or commissions.	Correct Incorrect
(B) Home appraisal costs.	Correct Incorrect
(C) Lender's Title Insurance.	Correct Incorrect
(D) Loan Origination Fees	Correct Incorrect

The costs of a home appraisal and loan origination fees are all typically part of the mortgage approval process, while lender´s title insurance, which protects your lender against problems with the title to your property, is usually required to obtain a loan. Those costs are typically passed on to the consumer. All of these items should be disclosed to the home purchaser in both the Loan Estimate and Closing Disclosure documents that your lender must provide you. Realtor fees are negotiated between the home seller and the selling realtor. The home seller is responsible for those fees.

Question 8

Before deciding to move from being a renter to being a home buyer, how long should you be planning to stay in your new residence in order for the move to make financial sense?

(A) 1 to 2 years.	Correct Incorrect
(B) 3 to 4 years.	Correct Incorrect
(C) 5 to 7 years.	Correct Incorrect
(D) 8 or more years.	Correct Incorrect

While ´your mileage may vary´ is probably a more accurate answer, most experts recommend that you plan on staying in your home for 5 to 7 years in order for the home purchase to make financial sense. Here´s why. With each home purchase, you´re going to pay closing costs typically in the range of 3% to 6% of the home value. Secondly, when you sell your home, you´re going to pay around 6% of the sales price in realtor fees. If your home value is appreciating at a typical rate of 2% per year, you´ll build sufficient equity in a 5 year period to roughly cover those closing and realtor fee costs. If you move sooner, you may be leaving the transaction with less equity in your home than when you bought the home.

Question 9

The acronym "PITI" stands for:

(A) Points, Income, Title, Interest.	Correct Incorrect
(B) Principal, Interest, Taxes, Insurance.	Correct Incorrect
(C) Pre-qualification, Income, Taxes, Interest.	Correct Incorrect
(D) Price, Investment, Taxes, Income.	Correct Incorrect

"PITI", which are the elements that typically make up your monthly mortgage payment, stands for Principle, Interest, Taxes and Insurance.

Question 10

If you are a first-time homebuyer, which of the following cannot be used as a source of your down payment?

(A) Family gifts	Correct Incorrect
(B) Personal accounts	Correct Incorrect
(C) Taxable investments	Correct Incorrect
(D) Retirement accounts	Correct Incorrect
(E) All of these can be used as a source of your down payment.	Correct Incorrect

Most home buyers look at their own assets, such as personal checking, savings accounts and investments as their only source of cash for a down payment. However, most lenders will allow you to use gift money from an immediate family member (provided you can provide a gift letter for documentation purposes). In addition, most 401(k) plans allow for hardship withdrawals that allow you to withdraw funds without penalty for a permitted purpose. Among permitted purposes is the purchase of your first home.

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Are You Ready to Buy a Home?

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