Home ownership is a brutal two edged sword. Play your cards right and you’ll create a home and generate memories that’ll last a lifetime. At the same time you’ll build durable wealth. But, fail to do your homework and your homeownership dreams could morph into a financial nightmare. This is the brutal lesson too many African-Americans learned during the last great recession.
According to a report by the Institute on Assets and Social Policy,
Overall, half the collective wealth of African-American families was stripped away during the Great Recession due to the dominant role of home equity in their wealth portfolios and the prevalence of predatory high-risk loans in communities of color.
That’s why it’s more important than ever to treat the home buying process seriously. It will be the most important financial transaction you ever make.
Here are a few tips to make sure your next home purchase becomes a financial blessing instead of turning into a financial curse. This is information every person in the African American community needs to know before buying a home.
1. Examine Your Credit
Never before has a three digit number held so much financial significance. Simply put, the better your credit score… the lower the mortgage interest rate you’ll qualify for, potentially saving you tens of thousands of dollars over the life of your mortgage.
Ideally, you should examine your credit score at least a year before you start shopping for your home. Obtain your free credit reports from the government sanctioned website AnnualCreditReport.com to see if there are any errors on your credit reports which could adversely affect your credit score. In addition, attempt to pay down any credit card debt, continue to pay your bills on time, and avoid opening new lines of credit like personal loans or new car loans.
2. Shop Hard for Your Mortgage
You must shop around for the absolute best mortgage. In fact, you should spend just as much time shopping for a mortgage as you do searching for your new home. Small differences in interest rates could result in large differences in your monthly mortgage payments.
Consider a $300,000 home loan. A 30 year mortgage with a 20% downpayment at 3.5% interest would result in a monthly payment of $1078. The same mortgage at a 4.5% interest rate would cost you $1216 a month, or $49,680 more over the life of your loan.
3. Get Pre-approved For Your Mortgage
Pre-approval let’s you know exactly how much home you can purchase. Furthermore, it provides you with a competitive advantage in a sellers’ market, especially when several buyers are bidding on the same home.
4. Don’t Buy More Home Than You Can Afford
Just because your bank pre-approves you for a $300,000 mortgage, doesn’t mean you can afford a $300,000 home. To keep your home from turning into a financial nightmare, you must run the numbers.
Generally your mortgage related costs – mortgage payments, property taxes, and insurance – should not surpass 28% of your pretax income. The crucial mistake people make is failing to investigate how much they’ll pay in property taxes. In many cases taxes can total nearly a third of your monthly mortgage payment.
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5. Don’t Forget To Budget In Other Costs As Well.
Consider pest control, utilities, lawn care, snow removal and maintenance. The general rule of thumb is that maintenance itself will cost you 1% of your home’s value every year. Owners of a $300,000 home, for instance, would expect to spend, on average, $250 a month in repairs and home maintenance.
6. Save For A Significant Downpayment
Having a significant down payment for your home will go a long way to making sure your home becomes a safe investment. A larger down payment provides you with more equity in your home, allows you to secure a better interest rate for your mortgage, and ensures you’ll pay less in total interest over the life of your loan.
While you should secure a minimum 10% down payment, experts suggest you shoot for a 20% down payment. A 20% down payment allows you to avoid private mortgage insurance (PMI). PMI is an insurance premium you’re required to pay that protects lenders in case you default on your loan. It usually costs from .3% to 1.5% of the balance of your loan value every year. It is essentially a hidden tax for those without enough money for a significant down payment.
7. Research The Neighborhood
You’re not just buying a home, you’re buying into a neighborhood. In fact, your neighborhood is one of the biggest factors in determining how much your home will appreciate. Could you see yourself living in the area for the next 5, 10, 15 or 20 years? Will your new home afford a decent commute to work? Are supermarkets, restaurants, and department stores located within reasonable distance to your home? Most importantly, is your neighborhood located in a quality school district?
8. Get A Home Inspection
There’s nothing worse than purchasing a new home only to discover a few months later you need $4000 for a new roof or $7000 to replace your HVAC system. That’s why it’s critical to make sure you get a home inspection before purchasing any property.
You can ask the seller to replace anything that is in disrepair or negotiate a price discount on the home if it appears you’ll have to make significant repairs in the near future. In most cases, it even pays to get specialized inspections of the foundation, heating/air condition, and plumbing. A little money spent up front for inspections could save you a world of hurt down the road.
Home ownership can be an emotional and financial blessing. But, if you don’t do your homework, your new home could turn into a lead weight that sinks you financially.
BWMK, have you bought a home? What advice would you give others looking to purchase their first home?