Armed with the 5% to 10% required down payment and excellent credit, Dada contacted a  real estate agent and set out to find a condo. But her plans changed when she learned from her agent that a building with two two-bedroom apartments was about to hit the market. The owner had planned to list the property at $200,000 but accepted Dada’s offer of $150,000. It was appraised at $250,000. Dada doesn’t know why the seller accepted such a low offer but believes he may have been unaware of the property’s value or just had a bottom-line dollar amount for which he would sell it.

“When I went to look at it, I was like, ‘Oh, OK, I can have two apartments—somebody will live upstairs and pay the entire mortgage,’” Dada says. She closed in the summer of 2003 and, at 25, found herself the proud owner of a duplex. “My parents couldn’t believe it. My mom thought buying real estate was something only married couples did, but I did it as a single woman.”

(Continued on next page)

Dada soon found a tenant whose rent would pay more than 80% of her $1,100 monthly mortgage payment. Now, the duplex’s rental income covers the entire mortgage, which is less than $1,100 since Dada no longer pays mortgage insurance.

Her purchase also made sense to her friends, who turned to her for guidance about the real estate market. Dada invited 30 colleagues to her home, where she shared information and gave out her agent’s business card. That’s when a light bulb went on: She should get a real estate license. She signed up for evening classes (at her alma mater, Temple University), got her license in the summer of 2005, and started selling part time that winter.

Dada had created a pretty comfortable life for herself, but after living with a tenant for two years she was ready to move on to something new. She wanted to live in the trendy neighborhood near Temple called the Art Museum area. But the neighborhood, also known as Fairmount, was pricey: One-bedroom condos started at about $300,000. Undeterred, Dada did some research and found a six-bedroom, three-bathroom Victorian that had been on the market for more than a year.

(Continued on next page)

Once again, Dada got an amazing deal. She paid $220,000 for the home, $179,000 less than the asking price and less than half its appraised value. “I applied for a home equity line of credit against my duplex and used half the funds [$20,000] as the down payment,” she says.  She rented out her duplex apartment and moved into her new home in 2006.  Dada later decided to convert the single-family home into a triplex of three two-bedroom apartments.

To convert the more than 100-year-old Victorian, Dada applied for a home renovation loan. The six-month renovation, which started in April 2008, stretched to just over a year and went $3,500 over budget, but Dada was able to rent the units quickly once the work was complete. The mortgage on the triplex is less than $2,500, with monthly upkeep less than $100. Dada is already renting two of the units (for $1,125 and $1,175) and will rent the third, which she currently lives in, for $1,000 this month. She plans to move out of state to explore other opportunities.

Although risk is involved and property values can fall, Dada has done well as an investor. Her properties have allowed her to quit her full-time job and invest some money into Signature Red, the women-targeted marketing firm she opened in 2009.

(Continued on next page)

How she did it.
“Think location.” Focus on high rental areas such as those near schools or public transportation. “In my experience, if a property is located near a desired school, finding suitable buyers is easier,” Dada says. She’s even found that areas near average schools still rent very well.

Inquire about down payment assistance options. Even with lenders tightening their purse strings, there are still programs that offer down payment assistance to those who want to be homeowners. “If you want to buy a home but don’t think you can save money,” Dada says, “go to your local community development organization and ask about special programs.”

Select tenants wisely. When choosing a renter, be sure to: 1. Do a credit check. Look for delinquencies on the credit report, payment patterns, good referrals from previous landlords, and a solid work history. 2. Check references. Ask for a minimum of four and request that the sources vary—they could represent, for example, a friend, relative, colleague, and previous landlord (if applicable). Ask about the applicant’s character, habits, and cleanliness. 3. Trust your instincts. People present their “best” when they want something so you have to probe. Despite what appears on paper, if you have any doubts … pass. For more tips, read “Who Wants to Be a Landlord?” on BlackEnterprise.com.

Foreclosing on purpose seems to be a trend mortgage lenders don't like

More than ever, there are mixed messages out there for homeowners thinking about walking away from their mortgage obligations.

The Federal National Mortgage Association, better known as Fannie Mae, recently announced that it would penalize borrowers who purposely forego their home loan payments and go into default—even when they can afford them—because the value of their home has fallen below the amount they owe the bank. Fannie Mae, in an effort to discourage these so-called “strategic defaults,” said it would prevent borrowers who walked away from obtaining “a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.” Of course, the rules only apply to homeowners who have the capacity to pay and choose not to.

At the same time in California, state lawmakers are debating proposed legislation that would protect homeowners who strategically default from debt collectors. The California state Senate passed a bill earlier this month that would prevent lenders from seeking recourse for the amount of the borrower’s original home loan. If the borrower subsequently refinanced and took cash out of their equity in the home, however, the homeowner would be liable for what they borrowed above the original loan amount. The legislation is still pending and has yet to be reviewed by California’s State Assembly.

Though media reports have noted the rise of strategic defaults as the U.S. housing market attempts a recovery, the exact number of purposeful foreclosures are hard to come by. One Morgan Stanley analysis released in February estimated that these defaults accounted for about 12% of all foreclosures in the U.S.

Critics argue that California’s proposed law creates an incentive for homeowners to walk away. Here at Black Enterprise, we’ve advised that it’s almost never a good idea to engage in a strategic default. (See “Don’t Walk Away,” April 2010 issue) The repercussions are too steep.

John Simons is an editorial director and personal finance editor at Black Enterprise.

“Your decision to buy or rent depends on your financial situation and your lifestyle,” said Lynn Tollett, vice president of business and community development for HSBC bank.

Although interest rates are at historic lows, homes are selling below their market value and several tax incentives are available, still buying may not be the best option for you. There are many other things to consider. Tollett presented the advantages and disadvantages of owning and renting at this week’s home buyers seminar sponsored by the Bedford Central Community Development Corp. She recommends that you weigh the two to find out what is best for you.

Advantages of Renting:
You might have lower monthly rent versus a mortgage payment
Your security deposit is probably less than a down payment and closing cost
Renting is a good choice for those not ready to make a long-term commitment
You don’t have to manage or pay for repairs and maintenance on the building or the property it sits on.

Advantage of Owning:
Asset development: You build equity with each mortgage payment
Wealth creation: If the value of the home goes up you can make a profit
Tax advantages: Your mortgage interest, real estate taxes, private mortgage insurance and points are all tax deductible

Disadvantages of Renting:
No ownership and you’re not building assets
Rent may increase over time
Lack of stability. For example, you may have to move at your landlord’s request. He/she may have to sell the building.

Disadvantage of Owning:
Insurance and tax bills may go up
You have to pay for home maintenance
You have to maintain your land, yard, lawn etc.
Owning may be more expensive

If you’ve decided that it’s time to buy, it’s time to figure out how much you can afford. A down payment is usually 10 to 20 percent of the total cost of the home, but there are several programs that you can apply for that allow you to put down as little as 3 percent. To find out what you qualify for visit the US Department of Housing and Urban Development (HUD) website.

As a general rule of thumb you should spend no more than 28% of your gross income on your mortgage principal, interest, taxes, and insurance also referred to as PITI, Tollett explained.  For example, if your annual household income is $50,000, you can afford to pay $1,167 a month.

Tollet gave us the exercise below to determine what this means in terms of dollars based on our individual financial situations. Try it.

Your Annual Income x .28= $_________ (A)

$__________ (A) / 12= $__________ (B)

Divide your answer from line (A) by 12 and you’ll get the amount you’d be able to afford each month.

Lenders also want to know how much debt you’re carrying, even if you pay your bills on time. Tollett explained that you can have a large enough income for a mortgage, but still be denied for a loan if your regular debt payments are 36% or more of your total income.

You can evaluate the monthly amount you can pay towards your debts by completing the exercise below.

Annual income x .36= $__________(C)

$__________(C) / 12= $__________

This is the monthly amount you can pay towards any debt including credit card payments, loans, and the total PITI amount from line B.

Add up your monthly debts:
Credit Card Payments     $____________________
Any Loans                          $____________________
(B) from above                  $____________________
(D)                                     =$____________________

(D) should be smaller than or the same as (C) for you to qualify for the loan.

This exercise really helped me put everything into perspective. How about you? Merry Christmas and thanks for following. We’ll resume after the holiday with information on condos and cooperatives. Follow me at www.twitter.com/LaToyaReports.

Other posts in The Homebuyers Toolkit series:

Getting Started

Qualifying For A Mortgage

Key Players

Let’s Talk Money

Money Attitudes and Budgeting

Building Financial Security

How Your Credit Score Adds Up

LaToya M. Smith is a staff writer at Black Enterprise

Although she probably wouldn’t get approved for a mortgage with today’s tight restrictions, my point is that prior to taking on the duty of a mortgage make sure that you are ready. Getting into a legally binding financial commitment that can last for several decades is no joke.

Angela L. Barrow, a home mortgage consultant for Wells Fargo Bank and this week’s speaker at the Bedford Central Community Development Corp. homebuyers seminar series, talked to us about how to eliminate debt, how to create a budget, and how to set realistic goals. For this young woman, homeownership is attainable but should be a long-term goal.

If you’re thinking about purchasing a home in the near future, now is the time to go on a financial diet and clean up your credit.

ELIMINATE DEBT
“You have to change your current behavior,” says Barrow.  “Be honest and draw the line.” Follow these steps: Gather all your bills, list all your balances, list all your interest rates, and finally list all your minimum monthly payments. Identify the bills that you can get rid of quickly and then set a goal. Say, “I’m going to pay bill X off first in X amount of time.” Continue to make the minimum payment on your other bills. Repeat this for each debt.

To eliminate debt, it is imperative that you pay your bills on time. “A late payment can drop your credit score 50 to 60 points,” says Barrow. If you’re late with one card, you’re other cards can increase their rates too.  This is called a universal interest rate.

Also, look into overdraft protection to avoid penalties on your credit cards. You can opt out by calling your bank. They will set up your account so that if you don’t have enough funds for a purchase the bank will deny the charge to prevent overdraft fees.

CREATE A BUDGET
Start pinching your pennies. A budget estimates income and expenses. It will help you to determine exactly what you have coming in and going out and what you need to save in order to achieve your financial goals. A colleague of mine shared a great website with me that tracks spending. Visit Mint.com, download the free software and you can instantly see your spending habits and where you can cut back.

To help stay on track with your budget look into decreasing your cable/internet/phone package, bring your lunch to work, walk when possible, clip coupons, unplug appliances to reduce your electricity bill and do personal hygiene stuff on your own such as your hair and nails. I know I got an eye-roll for the last suggestion, but hey, I didn’t say it was going to be easy.

SET GOALS
It is said that individuals who write down their goals are more likely to accomplish them. Here are six steps Barrow provided to help achieve life goals:

•    Write your goals down
•    Be specific
•    Create a time line to achieve it
•    Develop a plan. Ask yourself: How do I get there? How much money do I need to reach that goal?
•    Establish a price that you are willing to pay for that goal
•    Think about your goal everyday.

Barrow suggest looking for pictures in magazines of your dream home to hang somewhere you can see it everyday. You can also create a vision board; check out our post, “Clear The Way” (which was also published in the Motivation section of the August 2009 issue of Black Enterprise magazine) to learn how.

Happy Thanksgiving and thanks for following. We’ll resume after the holiday. Got a question or comment? Follow me at www.twitter.com/LaToyaReports or leave a reply in the space below.

Other posts in The Homebuyers Toolkit series:

Getting Started

Qualifying For A Mortgage

Key Players

Let’s Talk Money

Building Financial Security

How Your Credit Score Adds Up

Renting vs. Buying

LaToya M. Smith is an editorial assistant at Black Enterprise

Enealia S. Nau, attorney at law; Kingsley Duah, vice president of sales/core property; and architect Patrick Barns, all of NauCorp. Properties, Inc.  helped us to further understand these three critical roles at this week’s home buying seminar sponsored by the Bedford Central Community Development Corp.

The attorney will deal with the real estate broker, handle the contract of sale, search and ensure the title, review the survey and your tax consequences, conduct the closing, and deal with the property condition and disclosure explains Nau. But, before choosing an attorney you should ask him/her these questions:

How long have you been in practice?
How many closings do you do a year?
Do you have any complaints against you?
Exactly what service and communication can I expect?
What paperwork is involved?
What is the process from start to finish?
How long will it take?
What happens if the seller cancels or if I change my mind?
How should I pick a real estate agent to work with you?
What are my expenses? What is your fee and how do I pay you?

“You want to make sure you find someone who is truly working for your best interests,” says Nau.

The real estate agent/broker is also a big part of the equation. “You should only contact a realtor when you’re ready to buy,” says Duah.  This is because realtors work on commission. They generally get paid 1% of the home purchase price once you close on the property. So if you don’t buy, they don’t get paid.

The role of the agent is to show you available houses in your price range that meet your needs. It is important to ask who the broker is representing. He/she may represent you, the seller, or both. This is important when negotiating the purchase price. If you make an offer, the broker will present your offer to the seller.

Lastly, the home inspector is responsible for surveying the property from basement to attic explains Barnes. The inspection includes an evaluation of the homes plumbing, electrical work, appliances, roof, and structural stability. This could save you a lot of money and prevent future maintenance. Making yourself aware of any flaws may help you negotiate a better price from the seller. I found the American Society of Home Inspectors Virtual Tour to be extremely helpful in understanding the inspection process.  Check it out, it’s well worth it.

Next week we’ll learn about the various grants available for home purchase, including the first-time homebuyer tax credit which has been extended to June. Also, follow me at www.twitter.com/LaToyaReports with daily tips for homebuyers.

Other posts in The Homebuyers Toolkit series:

Getting Started

Qualifying For A Mortgage

Let’s Talk Money

Money Attitudes and Budgeting

Building Financial Security

How Your Credit Score Adds Up

Renting vs. Buying

LaToya M. Smith is an editorial assistant at Black Enterprise

First of all, what is a mortgage? A mortgage is a type of loan used to purchase property. The preapproval process will tell you the maximum loan amount you could qualify for. Please don’t mistake this with prequalification, which is an affordability estimate. The preapproval process is a much more accurate process which involves verifying gross monthly income, the balances and payments on current debts like credit cards, and how much cash is available for a down payment. Assets, such as IRAs, stocks, and bonds are also itemized.

“You want to do a preapproval closer to the day you’re going to buy,” explains Johnson. This is because most preapprovals have a 90 day life span. After that everything needs to be re-verified.

There a five types of mortgage payment options. Depending on your situation you may choose a fixed-rate mortgage, adjustable-rate mortgage (ARM), interest only mortgage, balloon mortgage, or a jumbo mortgage. The two most common types are traditional and ARM.

A Traditional Fixed-Rate Mortgage is attractive to many buyers because it provides stability despite netting a higher interest rate. You can count on your payments being the same amount every month for the life of the loan.

ARMs offer a lower initial interest rate for a certain period of time but the mortgage lender can raise the rates according to market indexes. Lower mortgage payments may sound more appealing, but there are some risks involved. This option is best for individuals who don’t plan to be in the home for more than five years.

After your home purchase, you’ll pay your mortgage every month. Understanding how your payment works will help you to determine what you can afford to pay monthly. Remember the acronym “PITI” says Johnson. This refers to the Principal, Interest, Property Taxes, and Insurance. Let’s dissect it.

Principal: This is the amount of money you borrowed from the lender. Each month you’re paying a portion of that loan back.

Interest: This is a percentage that a borrower must pay for the privilege of borrowing money from the lender. Johnson warns not to compare mortgage offers solely on the interest rate alone. “Make sure you look at the annual percentage rate (APR),” she says. The APR is a better indicator of the true cost of the mortgage because it combines the loan’s interest cost and other fees charged by the lender over the life of the loan.

Property Taxes: Many people pay their real estate taxes as part of their mortgage payment. These taxes are paid to local and state governments and will vary depending on where you live, so it is wise to check how much property taxes are in the area you’re looking to purchase.

Insurance: Typical home owners insurance protects the owner from any financial loses on your property that might result because of fire, wind, or other hazards. Some individuals also get flood insurance if they live in an area at high flood risk. Individuals who purchase a home with less than a 20% down payment will be required to take out private mortgage insurance (PMI) to protect the lender from default.

When you apply for a mortgage, the lender will ask you to fill out a standard application known as a 1003 form (pronounced ten 03). It will ask you numerous questions about your financial situation and employment history. Here’s a list of what you can expect to include.

Assets: Last two months statements from you checking and savings accounts, stocks, bonds, W2 forms, money marketing accounts, retirement accounts, IRA, life insurance policies, child support etc.

Liabilities: You will also have to list all outstanding debt which may include credit card payments, other mortgages, car payments (leased or financed), student loans, collection accounts, etc.

“Disclose all your information,” says Johnson. Withholding information may result in civil liability, including monetary damages, criminal penalties including a fine, imprisonment, or both.

Join me next week to learn about some key players involved in the home buyer’s process. In the meantime follow me at www.twitter.com/LaToyaReports with daily tips for homebuyers.

Other posts in The Homebuyers Toolkit series:

Getting Started

Key Players

Let’s Talk Money

Money Attitudes and Budgeting

Building Financial Security

How Your Credit Score Adds Up

Renting vs. Buying

LaToya M. Smith is an editorial assistant at Black Enterprise

There are a lot of unsold homes out there, and many of us are eager to jump in. The first-time home buyer’s tax credit combined with lower mortgage rates makes it easy to get blindsided from the reality of what it takes to maintain a home, which is much more work than obtaining it.

“Consider your needs versus your wants,” says this week’s presenter, Leon T. Gelzer, Sr., a real estate professional for Joseph Felix Realty. “This is an opportunity to get in and stay in.”

In order to stay in your home you need to be honest about how much home you can afford. According to the Mortgage Bankers Association (MBA) many homeowners are already at the financial edge—43% spend more than they earn a year, 52% live paycheck to paycheck, and 42% of homeowners do not have 3 months reserves to live on.

You can check out Yahoo! Real Estate’s How Much House Can I Afford Calculator to estimate the maximum home price for which you may qualify based on your income, credit rating, current monthly expenses, down payment and the interest rate. Although this is useful it is best to visit a lender to find out for sure as they do no take in consideration future rental income and monthly debt.

Once you’ve determined how much home you can afford, consider the upfront and ongoing cost. Upfront costs include the down payment, closing cost, move in cost, and reserves.

Down payment: This is generally 20% of the home sale price. Buyers putting down less than 20% are normally required to take out private mortgage insurance (PMI). This is paid by a borrower (you) to protect the lender in case of default on the loan. But there are resources available to those who can’t come up with the 20%. Look into FHA loans. These loans are backed by the Federal Housing Administration and guarantee payment in case of default by the owner.

Closing Cost: The typical closing cost is between 4%-6% of the mortgage amount.

Move-in Cost: This cost can vary. Gelzer recommends that you hire professionals to help you move because you can get a deduction off your taxes.

Mortgage Reserves: As a general rule of thumb you should have at least 6 months worth of mortgage reserves to allow for emergencies and unexpected vacancies.

Utilities, maintenance, and repairs are all part of your ongoing costs.

So, now you know what you can afford and other cost to consider, but how do banks grade mortgage applicants? Banks look for the 4 C’s of Credit—Capital, Capacity, Credit, and Collateral. Gelzer explains each:

Capital: The banks want to see that you have had the full down payment in your savings for the past two months before they can approve your loan.

Capacity: The banks want you to verify that you have been employed for the last two years by reviewing your current pay stubs and tax returns to ensure you can manage and repay the mortgage loan.

Credit History: The banks will run your credit report to see your creditworthiness to ensure that you are in good standing with your creditors and verify your monthly debt.

Collateral: When your capital, capacity, and credit history is reviewed and you find a home and apply for a mortgage loan, the bank orders an appraisal to ensure that the property that you are purchasing is worth the amount of money that they are lending you.

We’ll pause here for now. The goal is to digest this wealth of information in bite-sized chunks. Check back next week where we’ll go through the process of qualifying for a mortgage.

For updates follow me at www.twitter.com/LaToyaReports.

Other posts in The Homebuyer’s Toolkit Series:

Qualifying For A Mortgage

Key Players

Let’s Talk Money

Money Attitudes and Budgeting

Building Financial Security

How Your Credit Score Adds Up

Renting vs. Buying

LaToya M. Smith is an editorial assistant at Black Enterprise.

A record number of homes are headed for foreclosure, as many as 1.5 million by the end of this year, thanks largely to the subprime mortgage mess. While this is a terrible set of circumstances for the families living in these homes, as well as the economy as a whole, it has put would-be buyers in the driver’s seat. However, this is true for all homes, not just those in foreclosure. There is already a glut of newly-built homes as well as existing homes, with owners offering all kinds of incentives to lure potential buyers. Depending on the market, it is possible to get a great deal on a home that is not in foreclosure, which for most people (assuming you have an income, good credit, and enough cash for a healthy down payment) is far easier, and far less risky, than pursuing a foreclosed property.

That said, if you really want to test the foreclosure market, there are three basic ways to go, each with its own set of challenges and risks.

You can buy property in a pre-foreclosure stage—the time between when the current owner receives a notice of default from their lender and the day the lender puts the property up for auction. This period may offer the best bargains, but it is also the most difficult, because you have to try to cut a deal directly with the owner of the house, who may not even know that the house has been placed on a foreclosure listing. Also, assuming you and the owner can come to terms, you have to complete the transaction quickly, with only a month, depending on the state, before the bank puts the home up for auction. You can go to RealtyTrac.com or Foreclosures.com for information on the foreclosure laws in each state. Unless you are an experienced real estate investor, trying to buy a pre-foreclosed property is an extremely difficult way to go.

However, next to buying a home at auction, buying a home pre-foreclosure may seem like a piece of cake. The auctioning of a home is the next stage of foreclosure. If you want to get in this game, you have to ante up cold hard cash—you can’t finance the purchase of auctioned properties. Plus, you have to buy the house sight unseen, as is—without title insurance. That means if there is a tax lien on the property you bought, you have to pay it off on top of the cost of the property itself. This is only for those with a stomach for risk and lotsof cold hard cash. Of course, if you have that kind of money, you could just buy one of the many non-foreclosed homes on the market.

Bank-owned properties—foreclosed properties that are not auctioned off and become owned by the bank (also known as REO or real estate-owned properties)—will be put it up for sale through a real estate broker. This is the easiest option for those seeking to buy a foreclosed property, but you may not get as good a price as you might with the other two options, as the bank is going to do its best to get a sale price at or near market value for the property. However, the sheer number of foreclosed properties on the market, with thousands more to follow, has put banks under pressure to move these properties, which could give you some leverage in negotiations. Tap the REO Network’s database to find REO brokers in your area.