John Topa, FHA Mortgage Specialist

When buying a home, you pay for more than just physical property at the closing table. You also pay a series of charges. Commonly, homebuyers lump all of these charges under the heading of "closing costs".

That's a miscategorization.

Many changes on a HUD-1 Settlement Statement are specifically not closing costs. They are more appropriately designated as "reserves" or monies "paid in advance".

These "prepaid items" include:

• Advance mortgage interest paid from the closing date to month-end
• Real estate taxes paid into an escrow account
• Homeowners insurance paid into an escrow account

Prepaid items are payments related to the home itself, and not payable to any third-parties faciliating the transaction.

This is different from "closing costs" which are charges stemming from the transaction itself. Closing costs can include lender fees, title fees, and government fees.

One way to gauge the difference between prepaid items and closing costs is to ask the question:

"Would these dollars be due even if I didn't buy this home today?"

If the answer is "yes", the charge in question is likely a prepaid item.

A 2004 study showed that 4 out of 5 credit reports contained at least one error.

The errors were of various types with different implications. A quarter of the errors, for example, were of the "serious" nature; errors that could lead to a credit denial because of a false-reporting delinquency or collection.

A much larger source of credit scoring errors, though, was related to misreported personal data.

More than half of the mistakes on credit reports were found to be related to erroneous name spellings, incorrect social security numbers, and/or wrong addresses.

These types of demographical errors can damage credit scores in not-so-obvious ways:

1. The strong credit report of a "Jr." may mix with the weak credit report of a "Sr.", or vice versa
2. Credit accounts demonstrating strong payment histories may be omitted
3. Derogatory credit of like-named people can "merge"

To limit demographical errors, a person should apply for new credit using a consistent form of their name, and then use that form on every new application.

John A. Smith, Jr., for example, should always apply for credit using the name "John A. Smith, Jr.".

Short-cutting an application with "John Smith" can lead to a "mixed" credit report that combines the tradelines of multiple John Smiths. Especially because there is a John Smith, Sr., who likely lived at the same address at one time, and who may have a similar social security number.

Credit agencies do not discern between two similar sets of demographic data very well.

In the four years since the original study, it's not likely that the 80% error rate has improved, but by limiting demographical errors in our own histories, we can reduce the frequency and severity of the problem.

When buying a home, there are two stages in the home loan approval process.

Stage 1 starts when a homebuyer submits a mortgage application to his loan officer for a pre-approval.

A pre-approval is a "walk-through" mortgage approval that says -- at a given purchase price and downpayment amount -- the home loan application will very likely be approved.

Stage 1 ends when the buyer signs a purchase contract on a home. At this point, the "walk-through" approval is useless because the buyer now needs a real home loan approval from an underwriter and not a loan officer.

Thus begins Stage 2.

During the second phase of the approval process, a mortgage underwriter is reviewing income, assets, credit, job history, and other items, too; the underwriters job is to make sure that the buyer meets the bank's criteria for lending.

If the loan officer did his job in Stage 1, Stage 2 is just a formality. And most times, it all goes according to plan.

Occasionally, though, a homebuyer sabotages his own mortgage approval by inadvertently changing his "risk profile". It doesn't happen on purpose, of course -- it just happens.

So, consider this a quick primer of what not to do while you're between Stage 1 and the completion of Stage 2 of the home loan approval process. Following these pointers will help keep the risk profile consistent.

1. Don't buy a new car (or take on a larger lease payment)
2. Don't quit your job or change industries (and certainly don't switch to a heavily commissioned role)
3. Don't transfer large sums of money into or out from your bank accounts (and remember that "large" is relative)
4. Don't miss a payment to a creditor (even if you don't think you owe it)
5. Don't open a new credit card (even if you're getting 10% off your new bedding)
6. Don't accept a cash gift without talking to your loan officer first (because there's rules on how to accept them)

There's other items, too, but this a good start.

Now, avoiding these mistakes may not be practical for everyone. Therefore, if you know you're going to violate a "rule", check with your loan officer first.

There are a lot of "gotchas" in mortgage lending and it helps to have professional guidance for your individual questions

When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account.

This up-front deposit is more commonly known as "earnest money".

A sales contract's earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Some factors that can influence earnest money amounts include:

• Market conditions: Stronger markets often call for more earnest money
• Buyer economics: First-time buyers often give less earnest money
• Seller psychology: Skeptical sellers often ask for more earnest money

No matter how large or how small, however, earnest money is supposed to give the seller a sign of good faith that the buyer wants to purchase the home.

To this end, earnest money can be forfeited if the buyer later "backs out" of the deal, or breaches the terms of the purchase agreement. Breaching, however, is infrequent.

This is because most purchase contracts are written with buyer-focused "outs" called "contingencies".

A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.

If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.

When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer's bottom line at settlement. If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.

Earnest money customs vary from state to state, city to city, and even locale to locale. Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts.

The earnest money you save may be your own.