When Kimberly Davis-Howard bought her first home as a rental property in Las Vegas, she was in graduate school and working full time as an MIS specialist at Macy’s department store in New York. She has vivid memories about her first home buying process. “I felt like I was giving information about my whole life,” Davis-Howard says. “I was in my 20s then, so I didn’t have much credit, but I had good credit.”
Davis-Howard remembers that the documentation required presented a challenge. “I didn’t know what to expect when I bought the first property. They told me I needed six months of bank statements, and I remember I didn’t save that many records back then. I lived in Manhattan, so I didn’t have a lot of space.” Ultimately, Davis-Howard, who was making around $34,000 at the time, submitted the proper documentation, put 5% down, and successfully purchased a two-bedroom, two-bathroom condo for $75,000. She says she sacrificed to save up the down payment for the Las Vegas property because, “I knew I was working toward self-employment so I wanted to have a more diverse portfolio with diverse investments and multiple streams of income.”
Davis-Howard, now 38, makes about $100,000 a year as a technology training consultant. She married husband Bruce, a 36-year-old time-share sales agent and licensed general contractor, in September 2005. Davis-Howard bought the home she and her husband live in and has another rental property in Manhattan. They both had homes prior to getting married; Bruce rents out his home in Texas.
In an effort to simplify and explain the home buying process, BLACK ENTERPRISE has compiled a five-part series designed to walk readers through the steps. In this installment, we’ll focus on the paperwork you’ll need to qualify for homeownership. If you are looking to purchase a home for the long term, it is paramount that you get your finances in order before you begin looking for a loan. Preparing for homeownership means understanding all of the financial responsibilities that come with owning a home and making sure you’re up to the challenge.
When your credit isn’t stellar, the home buying process can be daunting. When Frances Pratt decided to buy a home after landing a federal job with a $25,000 salary in 2001, she was determined to reach her goal. “I had been living in subsidized housing at the time, and when I got my job, I prayed, ‘God, if I can keep this job for one year, I’m going to get myself a house!'” But a year later, “I went to a mortgage broker and real estate broker and I realized that nobody was taking me seriously because I’d been employed for such a short period of time.”
The 39-year-old single mother of one asked everyone she knew in Chicago how she could change her situation. Her luck changed after a chance meeting with a stranger on a city bus. The stranger, who happened to be a loan officer at Pullman Regency Bank, overheard Pratt chatting about her dilemma and made an appointment with her to discuss getting her into a home.
Like many would-be homeowners, Pratt didn’t understand what it was about her credit profile that was keeping her from qualifying for a mortgage loan. She had about $2,200 in overdue utility bills so the loan officer guided her through the process of writing letters to her creditors and arranging payment schedules for the past due amounts. About a month after writing letters and making payments, Pratt’s credit score went from 540 to 650, high enough to begin applying for a mortgage loan again. Pullman Regency eventually approved Pratt for an $86,000 loan and she purchased her home in October 2002.
As big a task as repairing your credit might be, it’s only a portion of the preparations you’ll need to make before you purchase your home. Although Pratt thought she was financially prepared to buy a home because she could afford her mortgage payment each month, she concedes that there were other factors she did not take into account. “I didn’t calculate my utilities, which ran between $200 a month in the summer and $500 a month in the winter,” says Pratt. “Also, I didn’t really consider medical expenses,” which is significant because her 10-year-old daughter, Shontoria, has asthma and Pratt suffers from epilepsy. It’s important to understand how these types of expenses may affect your ability to pay a mortgage and meet other financial obligations before you purchase a home.
William C. Johnson Jr., a Washington, D.C., attorney specializing in consumer protection and civil rights, says that many times the allure of buying a home clouds the buyer’s judgment. “When someone wants a home, their wants may override their needs or what they can afford,” he explains, adding that a prospective home buyer must consider his or her debt-to-income ratio before buying. “For the most part, a person’s debt level should not exceed 33% of their monthly income, and the mortgage should not exceed 25% of their monthly income.” For example, “if a person brings home $8,000 a month and their monthly mortgage is $2,000, then they aren’t that bad off,” says Johnson. “However, if someone takes home $3,000 a month and their mortgage is $1,500, it is conceivable that with a car note, utilities, and other bills, the $1,500 that’s left could be used up quickly, leaving them open when emergencies come up.”
There are a number of steps you can take to minimize the risks involved in purchasing a home:
Prepare your finances and credit profile. Versi Garrett, director of lending services at Neighborhood Housing Services of Chicago Inc., says
start preparing your finances as soon as you make the decision to buy a home. “Concentrate on saving as much as possible,” she says. “After you buy, when something breaks, you are the landlord. It is important to save and be prepared for all unseen circumstances.” Pratt saved up four months of mortgage payments in case of an emergency.Garrett adds that you should not incur additional debt before and after you buy a home: “The purchase of large items such as a car or excessive credit card spending, decreases how much home you can afford.”
Taking care of the blemishes on your credit report, as Pratt did, is also important. “After I started paying [my overdue utilities] on time, I got a letter of credit from the energy and phone companies saying that I was paying on time,” says Pratt. You can’t get the best mortgage unless you show your best credit score.
NeighborWorks Homeownership Specialist Milt Sharp Jr. recommends having financial documentation easily accessible to expedite the mortgage loan underwriting process. “The biggest challenge for people is having supporting documentation,” he says. “If they don’t present everything to the bank and mortgage broker up front, they will get a letter saying additional information is needed. This might delay the process and frustrate the buyer.” Sharp says you should be prepared to present two years of completed tax returns, the last six months of savings account statements, and pay stubs for the last three months. While the lender will obtain your credit report, Sharp advises buyers, “Have your own copy in case there are any discrepancies.”
For those who may not have any established credit, “lenders can use nontraditional credit as a means of qualifying an applicant. Nontraditional credit is recurring monthly debt, such as rent, utilities, child support, etc.,” Sharp explains. “These payment histories are not reported directly to a credit reporting agency and therefore would need additional documentation to support them, such as a letter from your landlord stating that you have paid your rent on time for a period of a year or more.”
Get homeownership counseling or attend homeownership classes. Visit a local homeownership organization where you can find a counselor who will
go over your credit report with you, advise you about your current credit situation, and give you credit-repair solutions. He or she can also help you determine your affordability range. Generally, these organizations will enroll you in home buyer education courses that will give you information on everything from how to get pre-approved for a mortgage loan by a bank to making home repairs. Sharp suggests Consumer Credit Counseling Services (www.cccsintl.org) and NeighborWorks (www.nw.org) as good places to find counselors. Helpful home buying information can also be found online at www.fanniemae.com or www.freddiemac.com. Check the Department of Housing and Urban Development (www.hud.gov) and your state’s housing finance agency for certified counseling agencies as well.
Taking homeownership classes before you purchase a property can be advantageous because counselors can walk you through the home buying process in advance. Pratt credits homeownership counseling for helping her before she purchased her home and afterward when she encountered the unforeseen hurdle of losing her job.
Get a preapproval from your lender. Before you shop for a home, it’s a good idea to obtain a preapproval letter from your bank or financial institution. Stephanie Simon, vice president of emerging markets for Wells Fargo Home Mortgage, says getting preapproved shows you are serious about buying a home. “Preapproval is written confirmation that a lender has committed a certain dollar amount for the purchase of your future home, which helps narrow your search to homes that are within your price range. This process involves the home buyer completing a loan application and submitting all of their income, outstanding debts, and credit documentation for the lender to review,” she says.
Simon says, the preapproval letter communicates that you’ve completed several critical steps toward obtaining your mortgage, which may place your bid for a home ahead of competitors who may not know if they qualify for a loan large enough to purchase the property. “A preapproval letter will state the loan amount and mortgage type so the home buyer can shop for a house that fits within their budget and price range.” You will also know how much money you’ll need for a down payment and closing costs.
Homeowners can select a mortgage broker or a bank loan officer to finance their mortgage. “In general-market terms, a loan officer works for a specific lender and coordinates with the home buyer on behalf of the lender. A mortgage broker is an independent businessperson who works with a number of lenders and offers these lenders’ products to prospective home buyers,” Simon explains.
Shop for a home within your budget. Sharp advises his clients to apply what they’ve learned about debt-to-income ratio in their home buyer’s training classes to determine how large a mortgage payment they can truly afford. Then view several properties for the best value. When you find the home you want, you’ll be asked to sign a purchase contract and to make a deposit of “earnest money” for the home.
Get ready for the closing. Bring a new pen, preferably black, as all documents pertaining to the home are signed at this meeting. It’s essential to have a real estate attorney at this meeting to check all paperwork before you sign. At the end of the meeting, which may last longer than an hour, you’ll receive keys to your new home.
The closing date is set when the mortgage is approved and a commitment letter is signed by a lender. The buyer should be
aware of all the closing costs before attending the meeting to avoid “sticker shock.” There are several key players attending the closing. Along with the prospective homeowner, there’s the seller, the closing agent, the title insurance representative, and the escrow agent. The latter three can be individuals or one person who handles all the aspects. Be sure to read and understand all the documentation prior to signing. For most, a house is the single most important, and expensive, purchase they will ever make. Making sure you understand the process is critical.As lengthy as the steps to homeownership may appear, the process works when you are properly prepared. And with newer loan products like the “no doc” (no document) loan, some of the financial hurdles of obtaining a mortgage can be eliminated. After Davis-Howard got married, she and her husband decided to live in the Las Vegas home she purchased before they met. But when she purchased her current home in November 2003, she opted for less paperwork with the no doc loan. “My situation has become a lot more complicated over the years,” she says, referring to her status as an independent consultant, her increased assets, and higher income level. “The more information I give the banks, the more they scrutinize it.”
While the no doc loan might be appealing to some, Sharp explains that the loan product was originally designed “for people who are sole proprietors or people who work independently and have a credit score at least in the high 700s.” He advises consumers to research loan products thoroughly. “No document loans can be used in predatory lending,” he warns. “An unscrupulous lender may offer this type of loan knowing the client cannot afford the home or is at high risk.”
That’s why arming yourself with the proper knowledge and preparing your credit profile before you buy is crucial to you being a happy homeowner.
Resources For Home buyers
Bankrate.com (www.bankrate.com) Bankrate.com provides information on the most attractive mortgage rates in the country. It also has loads of information on purchasing property and understanding mortgages.
Interest.com (http://mortgages.interest.com/content/calculators/index.asp)The Interest.com Website can answer just about any question you have about costs associated with a home mortgage loan. The site’s mortgage calculator can help determine how much money you can afford to borrow, how much your mortgage can save you in taxes, and whether it is better for you to rent or own.
NeighborWorks America
(www.nw.org/network/home.asp) The NeighborWorks network of community organizations offers programs to help prospective homeowners purchase affordable homes and training programs to help maintain them. Programs are available in most states.
U.S. Department of Housing and Urban Development (www.hud.gov) HUD offers an array of information on buying, selling, and owning homes. The site also has information on affordable homes and foreclosures.