Mr. Cash, my question pertains to home ownership. Are there any programs that will assist me and my family in getting a house? I’m 27, my lady & I have good jobs, not so good credit, and a small down payment. We have a 7 month old little girl so we are ready to give her a better life.
-Trevor – Brooklyn, NY
Home ownership is a very important step as it relates to building wealth and financial freedom. Before I answer the question, anyone looking to become a home owner must be aware of a few things. Home ownership is a long term commitment. Before considering home ownership you must first sit and evaluate and make sure that it makes sense for your particular situation. If you are at a phase in your life in which you are just getting settled in a career, a new relationship or a new business venture, I would suggest that you really plan and strategize before you jump into home ownership. As we all know, the beginning of the recession started with the collapse of the US housing market. A lot of first time homeowners were so eager to be a part of the American dream that they either rushed or were duped into bad mortgages. As a result the foreclosure rate went up by 225%. According to RealtyTrac, a real estate organization that specializes in foreclosures and bank repossession a total of 3.1 million households submitted foreclosure filings in 2009 with a total of over 800,000 actually foreclosing. These alarming numbers have surely frightened many would be homeowners. In fact in you fast forward to this year; according to the Census Bureau, the home ownership rate fell to 66.9% in the first three months of the year. This means that less people are becoming homeowners with ownership at its lowest level in 11 years. With more homes available and with rates that are ridiculously low (Under 4.4%) you would think that people would be running to buy a home. The truth is that it is becoming more and more difficult to buy a home even in this buyers market because of a few things; first those who are cash investors are taking up all of the good properties at a low cost with is leaving nothing but houses that are priced good but either are distressed or located in bad neighborhoods. Secondly it’s also a fact that banks have now tightened their lending procedures which has made it more difficult to obtain a mortgage. They’ve increased the minimum credit scores, and now ask for so many pieces of documents including your blood type and first born (Just joking ) but nonetheless the process is more stringent. Despite that it shouldn’t deter you. If you feel you’re ready to realize that “American Dream” I would say Go for it!! Begin to plan and strategize your attack!
Nothing can ever take the place of planning. If you have created the habit of paying yourself first, religiously follow your budget and created a sound plan for the future, the odds are you will know when you are ready to purchase that home.
Some of the benefits of home ownership include wealth building, self- confidence, and a positive environment. It also improves neighborhoods and provides stability.
Continues to build Wealth
In a study done by the Consumer Federation of America (CFA) it was concluded that over half of the personal wealth that is held by lower income households comes by way of home ownership and the equity that is accumulated in the home. Once a home is purchased and the mortgage is eventually paid in full, the value of the home becomes a source of wealth because of its ability to be sold for cash. Even while the home is still being paid off the money that is paid towards the principal goes back to the home owner as equity as well as the added amount while the home is going up in value. There are also many tax benefits and savings that are provided to home owners, giving them two opportunities to build wealth. According to the Federal Reserve Board, the median net worth of most modest-income owners is almost $60,000 compared to less than $10,000 for renters in the same income group. The tax benefits include savings from mortgage interest, property tax, and other payments associated with financing your home. These payments give you the option to apply them to your tax deductions. In most cases they decrease the amount of income tax you have to pay when filing your taxes. Those who are renters allow the tax savings of home ownership to go to their landlord. The average tax savings for a home owner is about 12% equating to $120 for every $1,000 paid towards your home. If the home is never sold, it can be passed down from generation to generation giving the beneficiary access to more money to pay themselves first and to plan for the future.
Enhances self esteem
Home ownership builds self esteem by showing you that you have the discipline to make the American dream come true. Most people work very hard to make money and most spend it without having anything to show for it. When you can discipline yourself to save money and create a budget that will allow you to become a home owner it serves as a constant reminder everyday where your hard earned money has gone. According to a national survey done by Rossi and Weber, home owners possess significantly higher levels of self-confidence than renters.
Creates a positive environment
Depending on where you are in the life cycle you may or may not have any children. If you do or plan on having some in the future please take heed to the following statistics: A study done by Boehm and Schlottmann as well as the University of Tennessee, states that children of home owners are 59% more likely to become homeowners. Their children are also 25% more likely to graduate from high school and 116% more likely to graduate from college. A study done by www.Fightcrime.org shows that a 10% point increase in graduation rates would result in fewer murders and fewer aggravated assaults each year. Homeownership has also been shown to improve neighborhoods. It is a fact that in recent year’s home ownership in disadvantaged, low income neighborhoods has been increasing while crime in those same areas have been going down. Groups who advocate for community reinvestment as well as many law enforcement agencies have argued for years that access to banks, home ownership and small businesses are very important to the stability of a neighborhood. In a recent study that used the 2000 census report, which took the small business and home lending trends and compared them to the national crime report, came to the conclusion that as one increased the other decreased showing that there is a direct correlation between home ownership and low crime. The point is simply that home ownership teaches responsibility. When something is yours and you know that you worked hard for it, you tend to treat it better and have more appreciation for that thing. As it relates to home ownership, it gives you a stake in the community which makes most more involved in civic affairs, the school system and of course crime reduction. The absence of a negative environment has a trickledown effect on your overall well being, your stress level and ultimately your finances. Home ownership is more than just owning a piece of property, psychologically it can change the way people value themselves and their community. These new way of thinking can create wealth for generations and break the cycle of poverty.
Before you buy that home determine if you are ready!
Before you become a homeowner, there is important planning that has to be done to determine if you are ready. The reason why we saw so many foreclosures in the past was because most families were anxious to live the American dream but negated to properly plan or misunderstood the commitment that was needed to become a homeowner. The first step to determine your readiness is to have an idea in your head of the type of home you are looking to purchase (i.e. Co-op, condo, 1 family home, 2 family home, etc.) this will be based on your current and future lifestyle. Do what makes sense for you now but be sure to plan for your future as well. If you anticipate any major life events such as marriage, the birth of a child, relocation, career change and so forth it would be advisable to wait until that settles down before you pursue home ownership. After you decide on the type of home you want you then need to calculate your Income, Savings, Monthly expenses, and Debt. If you’re following a budget (as you should be) these things should be readily available. This should determine how much in monthly mortgage payments you can afford without drastically affecting your budget. Keep in mind that if you do need a mortgage you will need money for down payment, closing cost, as well as an emergency fund. With that in mind the purchase of a home should not in no way deplete all of your savings. After doing the calculations, if it does than you are not ready! You should continue to save your money. If you are ready then there are absolutely programs available that will get you into that home.
To answer the question more specifically there a two programs in particular that can assist if you have limited funds and/or credit issues:
A FHA loan is a mortgage program that is available to low and moderate-income families who are credit worthy but don’t qualify for a regular mortgage. FHA which stands for the Federal Housing Administration is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. What they do is provide mortgage insurance on loans made by FHA approved lenders so essentially it is the agency that is taking the risk not the bank. This allows the FHA to set the rules. To qualify for a FHA loan you must be purchasing a home as your primary residence; second homes or investment properties are not allowed. You also have to be purchasing a 1-4 family home or condo; no co-ops. Some other eligibility requirements include being a U.S. Citizen or Permanent resident alien, two years history of credit and income, at least two years removed from bankruptcy, and you can not own other FHA loan property. You can put a minimum of 3.5% down payment, which is way less that the 20% that is usually required for a conventional loans. The minimum credit score is 600 compared to 620 with conventional and you receive the same interest rate as other applicants compared to conventional loans which base their rates on risk (lower credit score, higher rate). Some other highlights of a FHA loan is that it allows non-occupying income to qualify, 100% gift for down payment and closing cost, 6% sellers contribution, you can qualify 3 years after foreclosure, and you don’t have to have any cash reserves. Some FHA approved lenders include: Banco Popular, Capital One, Carver Federal Savings Bank, Citi Bank, Chase, and MCU (Municipal Credit Union) just to name a few. For a complete list of banks in your area go to www.Hud.gov
Down payment assistance programs
Another tool that can help while on your quest for home ownership is a Down Payment assistance program. In particular the Federal Home Loan Bank has something called the First Home Club (FHC) which helps people who are looking to purchase their first homes. They provide a $4 match for every $1 you save towards the down payment of your first home up to $7,500. That’s free money!! The only stipulations are: You have to open a dedicated savings account with an approved bank and agree to save systematically on a monthly basis for a period of 10-24 month, you have to complete a home buyer counseling program, and you have to obtain your mortgage through an approved member. Some approved banks include: Banco Popular, Carver Federal Savings Bank and HSBC, amongst others. For more detail please visit www.fhlbny.com.
One Last Note: Stop Making Your Landlord Rich!! With the proper plan and proper mindset you can become a homeowner and live that American Dream!!
Ash’Cash is a Business Consultant, Motivational Speaker, Personal Finance Expert and the author of Mind Right, Money Right: 10 Laws of Financial Freedom. If you have any financial questions for Mr. Cash please visit his website, www.AskAshCash.com, email him at Questions@AskAshCash.com or write to: Ash Cash Enterprises, LLC; P.O. Box 2717, New York, NY 10027