Home Work / In these courses, first-time buyers learn valuable lessons about hidden costs and potential problems
Two years ago, Ben Milano cut up 10 credit cards and took
mortgage, appraisal and property management classes to prepare to buy his
split-level, three-bedroom home in Lindenhurst.
"These classes teach you what to look for, the signs of bad home ownership
maintenance, and how to get your finances together," said Milano, 41. "I didn't
know anything about real estate before I took the classes."
Even though Milano and his wife, Jennifer, 31, were cautious in choosing a
relatively problem-free home, they were surprised by some unexpected expenses
after moving in last July.
"I didn't expect the water bill to be so high," Ben Milano said. "It varies
between $155 and $175 a month, which is abnormally high in this area,
especially for this time of year."
Like the Milanos, many prospective first-time home buyers don't factor in
the unexpected hidden costs that go along with a home, such as moving expenses,
higher utility bills, lawn care, storm damage, changing door locks, buying
furniture, paying property taxes and alarm installation. As a result, experts
say, many young homeowners wind up house-bound or locked into a mortgage they
cannot afford.
"There are a lot of lenders out there that will give you a loan that you
may not be able to pay so that you get locked into a loan," says Erika White,
program manager for home ownership lending at the Neighborhood Housing
Services, a nonprofit organization that provides education and counseling to
low- and moderate-income people in Jamaica. "We see a lot of foreclosures and
people victimized with high interest rates and high costs when they have
perfect credit. They could have qualified for a program that is much more
affordable."
That's where doing your "home work" comes into play.
Prospective home buyers can prepare nine months to a year in advance to
purchase a home by enrolling in a counseling course that is certified by the
U.S. Department of Housing and Urban Development. Not only do the classes
provide education, but they can qualify students for a lower mortgage.
"Banks often give slightly preferred rates to people who have attended
certified homeownership counseling because history has shown that people who
have attended homeownership counseling with the curriculum of the certified
programs have lower default rates," says David Jackson, assistant commissioner
of the Division of Home Ownership for New York City's Housing Preservation and
Development Department.
Among the local nonprofit home ownership organizations that offer certified
classes are the Neighborhood Housing Services in Jamaica, the Long Island
Housing Partnership in Hauppauge, the Community Development Corp. in Centereach
and Freeport, and the New York Mortgage Coalition in Manhattan.
To help them get the best deal, clients are asked to tote their tax
returns, pay stubs, credit report and bank statements to class so the counselor
can help determine how much house they can afford.
Most classes and counseling sessions are free or ask for a nominal fee to
cover registration and course materials. For example, the Neighborhood Housing
Services in Jamaica charges a $100 registration fee for a five-month certified
class, which includes course materials and a copy of the participant's credit
report.
While today's low mortgage rates are helping many first-time home buyers
pay for a higher-priced house than they might otherwise be able to afford, such
a move might also be risky.
"If you buy too much house, you may have other obligations you can no
longer afford, such as day-care bills," Jackson says. "Better to sit with
someone to work out a realistic budget."
The formula for determining how much house you can afford includes
"front-end and back-end ratios." The front-end ratio is the cost of housing
divided by gross monthly income.
"It should be less than or equal to 33 percent. Basically, they don't want
you to spend more than a third of your income on your housing cost," says
Caroline Samuels, director of the New York Mortgage Coalition, a nonprofit
organization that provides home ownership education and counseling to low- and
moderate-income people in New York City and on Long Island.
When pursuing a home, it's important to factor in closing costs, which are
the out-of-pocket expenses needed to pay the fees associated with a mortgage,
Jackson says. They may include origination fees and the price of an attorney to
look over documents before signing. Closing costs generally amount to 3
percent to 5 percent of the home price, according to Jackson.
"You should save about 6 to 10 percent of the cost of the home to cover the
down payment and closing costs in a separate account," Jackson says. "If you
make a 5 percent down payment on a home, the other 5 percent of the home price
would go toward your closing costs," Jackson said. Although not a required
expense, a home inspector can spot defects that the home buyer may not see.
Hiring a home inspector who is also a licensed engineer can help lower your
housing bill by giving the home buyer ammunition to negotiate a lower price by
identifying some of the home's flaws or features that need updating. Among the
key parts to inspect are the home's plumbing system, the roof and the
electrical wiring to avoid unreasonable home maintenance costs.
Certified home inspectors can be found in telephone book directories, an
Internet search or via recommendation from the classes. Inspection costs can
vary from $300 to $600 for one session depending on the size of the home and
the inspector. For a single-family home, expect to pay about $300.
"It's worth the price because they look for things the homeowner would
never think of. For example, stains on the wall, which can indicate a leaky
roof or moisture," White says. "A lot of times, the seller paints over things,
which is why the home inspection is important."
Other things you can investigate on your own include the school district
and the neighborhood: driving by the property in the daytime and the evening to
see what the neighborhood is like at different times, and talking to neighbors
about safety and other issues.
"You have to do your homework to see if the asking price for the property
is worth it," says White. "It's a lot of work."
Owning a home, experts say, is like having a baby: At times it involves
sacrifice.
Before you make the plunge, you have to develop financial responsibility,
willingness to budget and the ability to forgo immediate gratification.
"You have to be responsible and financially savvy enough to pay your bills
and be willing to cancel a vacation to cover your home expenses and repairs,"
Samuels says.
One effective strategy to help deal with costs such as unexpected repairs
or storm is to create a contingency fund, in which you stash 10 percent of your
mortgage payment every month. "With that strategy, over the course of the year
you have a little bit more than one mortgage payment in the bank so when the
roof needs to be replaced, you already saved the money to do that rather than
having to find it at the last minute," Jackson says.
For remodeling concerns, White suggests having three to six months of
housing expenses in an account as a cushion when painting, installing wall
paneling or new carpeting, or building a deck, for example. Housing expenses
include utility payments, food, telephone bills and other costs associated with
running a home.
If all else fails, apply for a home rehabilitation loan from a bank or
local government. New York City, for example, offers a subsidized loan product
called the HIP loan, available to people who meet the income guidelines. The
median income of clients who got loans through the New York Mortgage Coalition
in 2002 was $49,236, which enabled clients to borrow an average loan of
$168,076, according to Samuels.
"We offer smaller emergency loans for people who need to make emergency
repairs, such as storm damage. They are low-interest loans so lower-income
people can afford them," she said. The steps to take to prepare financially
include saving money, getting prequalified for a mortgage and cleaning up your
credit.
Many municipalities on Long Island also offer "rehab loans" for low- and
moderate-income families, according to Peter Sylver, deputy Nassau County
executive for economic development. "Those are usually done by lottery," Sylver
said. "We fund a variety of local municipalities that then do the programs."
As far as saving money is concerned, White says lenders like to see that
prospective buyers are able to save money consistently because it indicates
fiscal responsibility. Prequalification involves evaluating credit, income and
assets, which helps the lender determine the amount of a mortgage the
prospective home buyer can afford.
Cleaning up credit means paying bills on time and lowering credit card
balances so that the account is not up to its maximum.
"We look at how much debt you're actually carrying because if your debt
load is too high, it can disqualify you from a loan," White says.
A strong credit rating also can help lower your down payment. "In the last
10 to 15 years, Fannie Mae and Freddie Mac have developed 97 percent
loan-to-value products that allow for people with lower credit scores to pay
lower down payments," Jackson says.
The first thing to do is look over your credit report for errors or
delinquencies that have been resolved but that remain on your report. Write a
letter to the credit bureau in order to remove the mistakes.
If you're behind in making payments, get current by paying on time.
Like Ben Milano, pay down some debt if you have outstanding balances and
close accounts you no longer use. "I reviewed my entire credit report a year in
advance and wrote letters to correct mistakes. I made sure those mistakes were
taken care of before I applied for a mortgage," Milano said.
Lenders appreciate an applicant who has steady income. "The bank wants to
see that you are in a job or career that you've been at for awhile," Samuel
adds. They're not going to look at somebody who's had a different job every
three months."
Looking for Help?
Buying a home is a lot of preparation, but prospective first-time buyers don't
have to face the task alone.
Many local classes are available to help people take the step into
homeownership. For information about these classes, you can visit the Web sites
of organizations such as:
New York City Department of Housing Preservation and Development (www.NYChome.
org)
Community Development Corp. of Long Island (www.cdcli.org)
Neighborhood Housing Services (www.NHS Jamaica.org)
Long Island Housing Partnership (www.lihp .org)
Or call the New York Mortgage Coalition at 646-336-8609.
