Wealth Wednesday: Six financial tips to help you get ready to purchase your first home.
Despite the foreclosure turmoil that the national real estate market has been through over the last few years, homeownership remains a highly coveted goal for African-Americans. It’s also a goal that’s getting more and more difficult to reach. In its February 2013 report, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide, the Institute on Assets and Social Policy (IASP) at Brandeis University singles out “years of homeownership” as one of the biggest drivers of the growing racial wealth gap (which increased from $85,000 in 1984 to $236,500 in 2009). According to the IASP, the number of years families owned their homes was the “largest predictor of the gap in wealth growth by race.”
Not only is real estate a good investment towards your future wealth, but it also helps to instill a pride of ownership that no other acquisition can provide while helping to close the widening wealth gap. Unfortunately, the home-buying process can be daunting for anyone who hasn’t experienced it before. Coming up with a down payment, going through extensive credit checks, and producing years’ worth of financial paperwork are just three of the hurdles that buyers have to go through to get to the finish line.
Here are six financial tips that will help position you to purchase your first home:
1. Figure Out What You Can Afford First
Take an introspective look at your monthly debt obligations, income, and income projections over the next 1-2 years. Consider the financial impact of your current housing payment and imagine what that would equate to if you added homeowners insurance premiums, property taxes, and maintenance/repair fees on top of it. Use an online calculator like CNNMoney’s How much house can you afford?, to come up with an “affordable” home price before applying for any loans or meeting with lenders.
2. Clean Up Your Credit
Visit AnnualCreditReport.com to obtain a free copy of your credit report. The site is run by the three largest credit reporting agencies in the U.S. and offers free annual credit reports, as required by federal law. When you receive the documents, look at your overall score, open lines of credit, and payment history.
Identify any inaccurate information and report it immediately to the credit bureau by phone. Once you’ve reported a discrepancy you may be asked to follow up in writing. The credit agency then has 30 days to review the request and contact the creditor about the problem. The creditor must verify the information within 30 days — if that doesn’t happen, then the credit bureau must remove the disputed information from your credit report.
3. Consider the Down Payment Requirements
Coming up with down payment cash is a major stumbling block for many first-time home buyers. Most lenders require 3 to 20 percent of the property value in cash upfront. The bigger your down payment the better as evidenced by the most recent rash of African-Americans who have had their homes foreclosed upon due to their use of “zero down” mortgages. Put simply, the more “skin” you have in the game (i.e., your down payment) the better the odds that you’ll pay your mortgage and related payments when they are due and avoid foreclosure.
If you’ve decided to target homes priced around $200,000, be prepared to come up with a $6,000 to $40,000 down payment (at the higher end you’ll be able to avoid paying $40–$125 per month in Private Mortgage Insurance [PMI]).
4. Dig Down Into Your Down Payment Resources
If you don't have the funds on hand, talk to friends and relatives about possibly “gifting” you some or all of the down-payment cash. Other options to explore include the U.S. Department of Veterans Affairs’ zero-down-payment mortgage program (for veterans, active duty personnel, and some members of the National Guard and military reserves) and local and state housing finance agencies (which offer down-payment assistance).
5. Shop Around for Your Mortgage
Don’t go with the first lender that pops up on your computer screen when researching homes online. Take the time to review the different types of mortgages available on the market today. You can use online resources like LendingTree or Bankrate to do side-by-side comparisons of lenders before making your final decision. To improve your chances of working with a reputable lender that is in good standing, visit the bank or credit union where you already do business and ask about home loan options. Talk to friends, family, and colleagues about their experiences (both good and bad) with specific lenders.
When you are reviewing your options be sure to compare the required down payment amounts, interest rates, terms, length of the loan, and other factors associated with a mortgage. Once you’ve picked at least three different options you’ll want to get pre-approved for a loan. This will help you look within your price range and will show realtors and home sellers that you’re a serious, qualified buyer.
6. Look to Uncle Sam for Help
Along with the government sources mentioned in #4, the Department of Housing and Urban Development (HUD) backs low-cost, first-time home-buyer loans via the Federal Housing Administration (FHA). The FHA insures the loan, which in turn allows lenders to offer low down payments, low closing costs, and more lenient credit qualifications. If you’re on a budget and looking for a fixer-upper, check out HUD’s 203(k) program, which provides loans large enough to cover the home cost and the price of the repairs.
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(Photo: Daniel Acker/Bloomberg via Getty Images)