10 keys to financing your home: everything you need to know when you shop for a home - B.E. Guide To Home Ownership—Part 1

Black Enterprise, July, 2003 by Donald Jay Korn

At BLACK ENTERPRISE, we believe homeownership is the key to building wealth in America. Over the next three months, we will present a comprehensive guide to help you take this vital step toward improving your financial future.

Terri Sly had enough of paying rent. "I felt like I was throwing away money each month," says Sly. "I wanted my own home." Last January, after a four-month search, Sly moved in to her own place--a newly built, four-bedroom house in suburban Atlanta. "There was a lot of paperwork involved," says the 29-year-old flight attendant. "But when I made my first mortgage payment, I felt that it was worth the effort."

Sly had two advantages when she started searching for a home loan. First, she knew she wanted to buy a house in a subdivision where a friend already owned a home. Second, she knew a real estate agent with a solid reputation. "The agent recommended a local loan officer with Wells Fargo," Sly says, "and my loan officer walked me through the entire process."

To help you make it through the process of securing financing for your home, loan officers and mortgage brokers suggest that you take the following steps:

1 LEARN THE LANGUAGE

Buying a home is one of the biggest purchases a person will make. It's important to understand financial terms so you can secure the best deal possible. "Many lenders, real estate firms, and nonprofit groups offer free homebuying seminars, which can help you get started," says Stephanie Simon, vice president of programs and products at Wells Fargo Home Mortgage Emerging Markets Division in Silver Spring, Maryland. "When you're trying to finance a home, you'll run into terminology you won't find elsewhere. These seminars can help you understand what people are talking about."

2 DON'T LET COST DETER YOU

"One common misconception is that you need lots of money to buy a house," says Simon. "There are ways to buy a house with very little money. In fact, one recent trend has been an increase in low, down-payment mortgages. People want to hold on to their cash to use for other things."

Nevertheless, you can't expect to get a free ticket for a new house. "You should have at least 10% of the cost of the house saved up to cover a down payment, closing costs, and other expenses," says Lisa Wilds, a Pittsburgh-based residential loan officer for National City Corp.

3 CHECK YOUR CREDIT

When you apply for a home loan, lenders will scrutinize your credit history. Wilds suggests paying down your financial obligations such as credit card debt and car loans. And Simon advises reviewing your credit report. "You need to know what's there before a lender does," she says.

You can get your credit report from Equifax (800-685-1111), Experian (888-397-3742), or TransUnion (800-888-4213). "If there are any errors, you will need to work with all three [agencies] to clear them up."

As you check your credit, you can find out your "credit score," a standardized measure used by many lenders to assess potential borrowers (900 is considered an ideal score). "Credit scores over 620 have a good chance for a conventional mortgage," says Debbra Carrigan, residential mortgage sales manager for Bank of America in Oakland, California. "If you're below that score, and especially if you're below 600, you may have to use more creative financing and pay a higher interest rate."

Even if you have had credit problems, don't give up on looking for a mortgage. When Ronald Jacobs, 41, and his wife, Bonita, 35, of Oakland, California, filed for bankruptcy in 1998, they were told by lenders to keep a clean credit record for two years before applying for a mortgage. "We kept our record clean, kept current on all bills, and went through a first-time homebuyer's program sponsored by a local community group," says Ronald. Working with Carrigan, the couple found a 30-year, fixed-rate mortgage in 2000 and have since refinanced at a lower interest rate.

4 HOW MUCH CAN YOU AFFORD?

In real estate lingo, you need to be "pre-qualified" to buy a house for a given amount. No real estate agent will bother showing you $300,000 homes if your finances won't stretch beyond $50,000.

"[Being pre-qualified] just gives you an idea of how much of a mortgage you can expect, based on your income," says Keith Gumbinger, vice president of the Butler, New Jersey-based HSH Associates, a financial publishing company that compiles mortgage industry data. "As a rule of thumb, you can get a mortgage of 2.5 to 2.75 times your income." Thus, if you make $60,000 a year, you might be pre-qualified for a mortgage of $150,000-$165,000. You can calculate how much home you can afford at blackenterprise .com (www.blackenterprise.com).

5 DECIDE ON A LENDER OR BROKER

When lining up financing, you can work directly with a lending institution or you can hire a mortgage broker who'll choose from a number of lenders.

"I started out with a broker through a referral," says Janine Greer, 35, an insurance adjuster in Oakland, California. "It soon became apparent that he didn't know what he was doing; he was telling me that I'd have to sell my car to get rid of my car loan in order to get a mortgage. The bottom line was that he never found a lender. Fortunately, I connected with Debbra Carrigan at Bank of America, who put together the loan I needed."