Home buying is the most overwhelming and stressful purchase the American consumer goes through. My name is Imad Shehade and I have been in this business for over 15 years, this will be my attempt to answer your questions and take the mystery out of this process. Please feel free to call me for any other questions and/or a personal consultation at 773-456-6900. My experience is concentrated in the Chicago Land area and its market dynamics.

In this process it's important to accomplish 2 things before getting started:

The first thing you should do is get pre-approved for a mortgage. You may be wondering why you should go through this when you don't even have a property in mind yet. It seems silly to secure the money before the house, but believe me, this is the least stressful way of getting your home and there are advantages of doing it this way. These advantages will become clear later in the process. Pre-approval is free, is not a committment, and simply gives you a clear idea of what you can afford, how much you can spend and starts your awareness of the mortgage process.

When you start with a pre-approval, not a pre-qualification, there are differences. You actually start the mortgage process by submitting your paper work to the lender, signing the mortgage application's "1003" and going through UNDERWRITING. Other than identifying a property and appraising it, this is the complete process which we will cover in further detail a bit later.

Once you are pre-approved, you have a very good idea of how much you can afford to spend and how much your monthly payment will be. Please pay attention to the difference between WHAT YOU CAN AFFORD and WHAT IS YOUR COMFORTABLE SPENDING LIMIT. This all goes back to your preference, and it's a big difference. I advise my clients to pay what they WANT to pay and are COMFORTABLE paying every month and not necessarily max out what they can afford and make a higher payment. Based on the COMFORT payment, you know the price you want to spend for the house and you are armed with a pre-approval certificate which makes you a VIP (Very Important Purchaser).

As an example, I did a loan for a client, his offer of 12K less than the highest bidder was accepted ONLY because he had a pre-approval and not a pre-qualification. The seller was assured that this transaction was going to close and took the lesser offer but with better terms.

Now you can start the real estate process. The following is a list of what these steps are:

Contingencies are conditions which must be completed in a timely manner, or else the validity of the contract is voided. Think of it as a time line that starts on the date the seller accepts the buyer's offer and a contract is born.

Attorney Approval: Typically runs 5 days from start date. This is where your attorney can look over whatever you signed and make sure it is in your best interest. If you both decide it is not, getting out of the contract and getting your Earnest Money back is simple.

Property Inspection: Typically runs 5 days from start date. When a contract is born, the buyer earns the right to inspect the property and discover any defects reported or unreported by the seller. Upon inspection a property report is written and buyers can use that report to either ask for monetary credit to cure whatever defect they find - they can back out of the deal or they can go through with it. It all depends on what they find and the cost to ensure that the issue is resolved.

Mortgage Contingency: Typically runs 30 days or so from start date. If you can't get a mortgage, then you are out of the contract. This is why getting pre-approved in the beginning takes this uncertainty away from you. When you are armed with a pre-approval, you can shop and look with confidence that you are going to get the home you choose. This takes away all the anxiety attached to the mortgage process and will save you the sleepless nights wondering if you are going to get this home.

Applying for a mortgage does not need to be a complicated or difficult experience. Just like realtors, you need the right partner that will lead you through this process and make sure you are aware of what's going on and kept up to date as to the progress of this process.

The name of the mortgage application is the "1003" and this is a federally regulated document which must be TRUTHFULLY completed in its entirety. Fudging facts or figures on the 1003 will constitute FRAUD. One should not tell anything but the truth on this document. As long as you know what you are signing and aren't hiding anything, don't be afraid to sign it. Based on my 15+ years in this industry, the loan officer, WILL find out the truth in the verification process.

When applying for a mortgage, buyers actually give the mortgage to the bank to collateralize the debt and receive the money to complete the transaction. At the closing table, buyers sign the mortgage documents, which gives the bank the right to foreclose the property if you don't pay and the promissory note - the instrument which spells out that the buyer will pay X amount for the interest rate, Y amount per month for the next however months you want (typically, there are 15, 20, 30, or 40 year mortgages). So, the home owner is the mortgagor and the bank/lender is the mortgagee.

Good Faith Estimate: This is a very important document you will receive from your lender. This document details the closing costs and how much money the buyer has to bring to the closing table.

Even though it is called the Good Faith Estimate, the numbers should match the Settlement Statement/HUD-1 you receive at the closing table, within a couple of hundred dollars. There can be no secrets or surprises. A reputable lender will share this with you and explain all the numbers that appear on this form, which you will be asked to sign.

There are 5 variables that lenders look for and verify from buyers, and it's the combination of these variables that will determine approval, denials, interest rate, and cost of financing:

Mortgage approval or denial is based on two numbers: Front Ratio (not higher than 32%) and the Back Ratio (not higher than 38%)

Principal & Interest, Taxes and Insurance (PITI) When home owners pay for the home, they have to pay the bank (P&I), the City of Chicago for property taxes (T) and the Insurance company (I). Condo buyers also have to pay an assessment which usually covers the insurance. PMI, the biggest rip off in this whole process, is also paid by buyers with less than 20% down payment, which is typically everybody. So, your payment is not rent anymore, it's PITI.

Front Ratio is the percentage of your new proposed housing payment (PITI) to your monthly income. For example, let's say you make $60,000. That is $5000 per month. Let's also assume that your new home's monthly payment (PITI) is $1500. Therefore, your front ratio is $1400/$5000= 30%.

Back Ratio is the percentage of your new proposed housing payment (PITI) PLUS your monthly debt to your income. For example, assume the same as above but you have a car payment for $320 and credit cards payments for $149. Your back ratio is ($1500+$320+$149) / $5000= 39%

That's basically it! If your ratios are within the guidelines, you get approved. I hope you can see the advantage of doing this before you start house shopping. I can tell you countless horror stories of people doing this backwards, falling in love with a home their realtor sold them on, only to find out 2 weeks later they can't afford it. This simply is horrible and most of the time turns people off from being home owners and they get back to renting. Please do this for your family - get pre-approved and take the drama out of this equation. After your approval, you might have to meet some conditions to the approval, they can be annoying at this stage and usually they are little things, so please be patient. Once you have satisfied all the lender's requirements a Clear To Close (CTC) is received and a closing can then be scheduled.

The CTC is communicated to the seller's attorney, the buyer's attorney, and the buyers themselves. This is when the seller attorney will typically order a title for the subject property. Title is the history of this property, who has owned it, and who has any liens against it. It is a necessary piece of this process, yet buyers don't have to worry about that because attorneys typically handle any title issues or gaps. Buyers will, however, pay for title insurance at the closing which insures your interest and ownership against anyone claiming ownership down the line.

Once the title is studied and cleared, a clear title can be conveyed to the buyer from the seller. The closing typically takes place at the title company.

Loan products are financial instruments not to be entered into lightly. An educated consumer is best equipped to make the decisions necessary when choosing a product.

Mortgage products are various and one need not have a formal finance education to understand this. The 2 major products are Fixed Rates Mortgages and Adjustable Rate Mortgages (ARM). Mortgages are amortized over a fixed period, typically 15, 20 or 30 years. The Fixed vs. Adjustable refers to the interest rate.

Fixed Rate: Means the date does not change for the period of the loan. Meaning if you get a 6%, 30 years fixed rate, that's it, it will not change for 30 years and if you make all your payment on time, the loan will be paid off in 30 years.

Adjustable Rate Mortgage (ARM): Even though ARMs are getting all the bad press and are being blamed for the market meltdown that we are going through in 2009, they can be and are very good products for certain individuals. Granted that based on today's conditions, it's tough to say no to a 5% fixed rate. However, let me ask you this - if this is your first home or you are being transferred out of state and will be transferred back in 5 years or you know for some reason you'll only be in this home for 7 years or so, why wouldn't you take a 4%, 10-year ARM? That means the introductory rate is fixed for 10 years. This is a calculated risk and properly explained and researched, can be a great product.

The reason for the meltdown is not the ARMs. It is the sub-prime/bad credit borrowers that were allowed to get financing when they were never a good candidate. It was the greed of Wall Street and the giants that created these crazy instruments which made buyers out of people with no business owning a mortgage. Not everyone is prepared to be a home owner. If you have exhibited trends of responsibility and employment stability and savings, then you are a great candidate. If you have changed jobs every year, have no savings to speak of, and you are over-extending the ratios and qualifications, that's a formula for disaster.

Teaser/Intro Rate: This is the initial period of time that the interest rate is fixed with no adjustments. This period can range from 1 month to 10 years. Your needs, financial position, and goals will drive your decision into the right instrument - fixed or adjustable.

After the introductory/teaser period, the interest rates will adjust based on the following formula:

RATE = Index + Margin

Index: This is a market value/variable the bank uses as a basis for cost of the bank raising money to lend to you the consumer. There are several indices out there. The most commonly used are the T-bill index, the LIBOR index and the COFI index. All these values are published in the Wall Street Journal monthly or on-line daily. A common index we all know is the DJIA or the NASDAQ. These are stock indices and their value summarizes the stocks in that index. For example: the T-bill index as of 8/15/2009 was 3.11%.

Margin: This is the profit margin the bank locks in for when the adjustment takes place. It is typically 2.75% to 3.25% depending on the situation. For this example, let's assume the margin to be at 2.75%.

So if your loan is adjusting today and you had an ARM that is tied to the T-bill index and your margin was 2.75% then the rate is 3.11% + 2.75% = 5.86%. So, pay attention to the INDEX and to the MARGIN in case you end up with a loan that will adjust. There are also limits of these adjustments, but that's getting too technical for the purpose of this guide.

The Closing: This is where it all ends and actually happens. You will get a deed to show ownership, a title policy showing your interest and the lien against the property held by your lender in first position. Please remember the mortgage is a lien against your property that is only satisfied once the lender is paid off.

Settlement Statement/HUD-1: This document is what closes the loop that is your transaction. This is a document detailing buyer and seller closing costs, debits and credits between title company, lenders, buyers and sellers. While it's not a complicated form, it is read in a certain way and your lawyer will typically walk you through this document.

Congratulations, you are a home owner. Now mow the lawn!