prepare to buy home

Bringing Financial Wellbeing To The Black Community

In honor of Black History Month, we’ve examined the racial disparity in homeownership and ways for the fintech, finance, and mortgage industries to improve Black Americans’ homeownership rate.

Homeownership is the primary way that American families accumulate wealth. Yet to attain the American Dream, Black Americans must overcome a disproportionate burden of student loan debt, a lower salary to help pay down the student loan debt, a lack of financial education, and inequality in the mortgage process.

The Disproportionate Burden of Student Debt

Student debt is the foremost hurdle facing most first-time homebuyers. It is also the primary reason that delays 76% of consumers from buying their first home. However, the student debt crisis has disproportionately impacted black borrowers and saddled black students with the most debt.

Black Americans borrow money for college at a higher rate than any other group: 86.8% of black students at public four-year colleges borrowed federal loans compared with 65% of Latino students and 65.9% of white students, according to the National Center for Education Statistics.

Black students with bachelor’s degrees owe $7,400 more student debt ($23,400 versus $16,000) on average upon graduation than white graduates, according to Brookings. Differences in interest accrual and graduate school borrowing lead to black graduates holding nearly $53,000 in student loan debt four years after graduation—almost twice as much as their white counterparts.

Black college graduates ages 21 to 24 earn $3.34 less per hour than their white peers, according to MarketWatch, despite holding similar qualifications and experience levels. That $7,000 annual difference negatively impacts their ability to pay down student debt.

Overcoming The Hurdles To Qualify For A Mortgage

Homeownership is often a more financially stable housing option than renting because it allows families to have more predictable housing costs. Yet, most Black families rent their homes, and the homeownership gap between Black and White Americans is growing wider.

The Fair Housing Act was passed in 1968 to open up opportunities for Black Americans to become homeowners by making it illegal to discriminate against any person from buying based on race and other protected classes. It eventually worked, when Black homeownership peaked at 69% in 2004 and 2005. However, numbers dropped following the 2008 housing crisis and haven’t recovered.

In Q3 2020, the percentage of Black Americans owning a home was 46.4%. It is 75.8% for non-Hispanic white alone householders. According to NAREB 2020 State of Housing in Black America, the homeownership rate for Black Americans who graduated from college is only 3.2% higher than that of White high school dropouts.

Lenders deny mortgages for Black applicants at a rate 80% higher than that of White applicants, according to 2020 data from the Home Mortgage Disclosure Act.

Black borrowers who do overcome the hurdles of mortgage qualification often pay higher rates for FHA-backed loans and conventional mortgages. According to the National Association of Real Estate Brokers, Inc. 2020 State of Housing in Black America report, in 2018, 53% of Black mortgage borrowers obtained FHA or VA loans, compared to 23% of White borrowers. Only 5% of the conventional market were loans to Black borrowers, compared to 15% of the FHA/VA market.

Reducing the Gap in Homeownership

To reduce discrimination and improve the homeownership rate for Black Americans, the Urban Institute made these recommendations in its report, Building Black Homeownership Bridges: A Five-Point Framework for Reducing the Racial Homeownership Gap:

  • Improve and expand financial education, housing counseling, and homeownership preparation to renters and younger generations
  • Helping Black renters gain access and understanding of homeownership tools at an earlier age
  • Explore more options for the use of fintech to advance understanding and access to homeownership
  • Encourage savings as money in the bank can alter a borrower’s subsequent probability of default
  • Increase visibility and access to down payment assistance and low-down payment lending programs
  • Expand small-dollar mortgages for purchase and renovation
  • Consider diverse sources of income to qualify for a mortgage
  • Strengthen post-purchase counseling
  • Tools to monitor real-time home values and home equity

Homeownership Can Provide The Black Community With Financial Wellbeing

Homeownership is the primary way that American families accumulate wealth. Wealth, when defined as the difference between what people own and what they owe, provides immediate financial security and long-term economic mobility. During an economic crisis, such as the current pandemic, families with wealth are more likely to have emergency savings to pay their bills if they’ve had their work hours reduced or experienced a permanent job loss.

According to the 2019 Survey of Consumer Finances, the typical White families’ home value is $230,000, yet the typical Black families’ home value is $150,000. Wealth is often passed from one generation to the next, whether through inherited wealth, financial education, or down payment support. Black families have fewer financial opportunities to give their children because the primary asset that drives wealth is difficult to attain and, once achieved, has a lower value, leaving them with less wealth to distribute.

FinLocker provides all users with the tools and educational resources achieve financial stability through homeownership. Putting a transparent, tech-driven financial solution into all consumers’ hands can help address the racial disparity in homeownership and wealth creation.

Here are some organizations that can provide additional resources:

National Association of Minority Mortgage Bankers of America (NAMMBA) – Supports minorities and women who work in the mortgage industry with education and career development. Currently focused on connecting 50,000 college students to positions within the real estate finance industry. #StudentChallenge.

Cultural Outreach – Focused on helping financial institutions and mortgage lenders connect with young and underserved markets. Here’s their Lender Resources.

LoanSense – Identifies federal loan programs and government subsidies to reduce student loan payments. The savings can help the borrower increase their homebuying budget. LoanSense knows how different loan programs handle student debt, so that they can recommend to the referring loan originator the best loan program for their borrower. Use the LoanSense Purchasing Power Tool to see how reducing student loan payments can increase a consumer’s home budget.

Lifestyle Benefits Of Owning Your Home

A home is more than just a roof and walls. The financial benefits of being a homeowner are easy to calculate. However, homeownership also has lifestyle, health, and social benefits for the homeowner, their extended family, and the community.

Gain a Community

Homeowners often feel more attached to their community. The more homeowners who reside in a neighborhood, the more stable and secure the neighborhood will be for all residents. Many neighborhoods have associations that will plan social events and volunteering opportunities so you can get to know the people who live around you.

Provide Stability

Psychologically, owning a home provides a sense of stability to homeowners. If you have children or want to start a family, owning your home can provide your family with the stability to plan for the future. You can stay put until you decide that the time is right for you to move, and when you do, you take the equity you’ve earned to help purchase your next home.

Improved Health

Studies show that overall well-being for a person improves when they move from renting to owning a home. Homes lived in by their owners are generally in better condition than those of renters. A steady home provides the family with higher self-esteem, lower levels of distress, and more positive mental health, which helps lower blood pressure.

Educational Achievements

According to a study in the Journal of Urban Economics, children of homeowners are significantly more likely to stay in school until age 17 than children of renters, especially in low-income households.

Children who lived in a homeowning family outperform children in renting families in both math and reading achievement tests. These children often have higher self-esteem, fewer behavioral problems, higher educational attainment, and greater future earnings, according to a study by an Ohio State University economist.

Show Your Style

Most landlords will not allow you to personalize the rental property by hanging pictures, painting walls, or retiling the backsplash. Buying a home gives you the flexibility to make cosmetic and functional modifications so your home can reflect your style and living requirements.

Renters do not gain any monetary value when they improve the property where they live. As a homeowner, any improvements are investments that will contribute to the home’s value.

Get A Pet

It is often difficult to find a rental property that will allow you to have a pet. And when they do, landlords usually require a pet deposit. When buying your own home, particularly one with a back yard, you gain the freedom to own dogs, cats, birds, lizards, chickens, or any other type of pet. Homeowner associations can restrict the number of pets, size, and breed of dogs, so check the HOA regulations before buying into an HOA community.

Financial Benefits Of Owning Your Home

The decision to buy or rent your home can be challenging. Homeownership has traditionally been an important way to build wealth. A view held by the majority of Americans: 84% believe that buying a home is a good financial decision.1

Owning a median-priced, three-bedroom home is more affordable than renting a three-bedroom property in most U.S. counties.2 Even in cities where housing prices are high, with interest rates at historic lows, owning a home can still be the more affordable option long-term.

Here are four reasons why purchasing a home can be a smart financial decision.

Build Personal Wealth

The most recent Survey of Consumer Finances showed that the average homeowner has a household wealth of $254,900, while the average renter has a household wealth of $6,270. This means that the net worth of a homeowner is over 40 times greater than that of a renter!

Homeownership rates peak at or near retirement ages, suggesting that buying a home provides long-term financial stability and the foundation for a comfortable retirement.

Build Equity

When you rent a home, your monthly payments can help you build credit. However, your rent money is going to your landlord. When you own a home, your monthly mortgage payments enable you to build equity over time, which increases your net worth.

Home prices are currently rising faster than rents in 63% of the U.S. housing markets.3 In the third quarter of 2020, U.S. homeowners with mortgages (roughly 63% of all homeowners) collectively saw their equity increase by 10.8% year over year.4 This amount averages to an increase of $17,000 per homeowner! What’s more, home prices are forecast to increase by 2.5% from November 2020 to November 20214, which means with each monthly mortgage payment, you’ll be earning additional equity in your home.

Stable Housing Payments

For the past few years, rent payments for a single-family home have increased 3-4% each year.5 Currently, mortgage rates are at historic lows. Buying a home with a fixed-rate mortgage will enable you to lock in the interest rate, so your monthly mortgage payment will remain the same for the duration of your mortgage term.

Tax Benefits

In the tax world, there are deductions, and there are credits. Credits represent money taken off of your tax bill. A tax deduction reduces your adjusted gross income, which in turn reduces your tax liability.

Most of the favorable tax treatments that come from owning a home are in the form of deductions. Mortgage interest, real estate or property taxes, Private Mortgage Insurance (PMI), and other origination fees may be deductible on your income taxes. A professional tax accountant can advise you on how to deduct these payments.

Some states and counties offer a reduction in annual property tax through the Homestead Exemption program if the house is your primary residence. Learn how to file for a Homestead Exemption.

 

1 National Association of Realtors Housing Pulse Survey
2 ATTOM Data Solutions 2021 Rental Affordability Report
3 CoreLogic Home Price Index (HPI®) Report
4 CoreLogic Home Equity Report
5 CoreLogic Single-Family Rent Index

10 Ways To Prepare To Buy A Home

Nationwide, cities are low on inventory for starter homes, and this situation is expected to remain the same in 2021. It is important to get organized for your home purchase now, so you’ll be prepared to make an offer when you find the right home.

Many of these tips apply to current homeowners looking to upgrade to a larger home to raise their family or downsize for retirement, and those looking to make their first major purchase, such as a new car.

Review your credit score and credit report

FinLocker makes it easy to monitor your credit report by displaying your credit score on the Dashboard so you can easily see it every time you sign in. If you haven’t signed up for Credit, stop reading this article now, open your FinLocker app, and sign up – it only takes a few seconds – then resume reading this article.

Review each of your credit reports to ensure there are no errors. You can also obtain a free credit report from each of the three credit bureaus from AnnualCreditReport.com. Your mortgage lender will be reviewing your credit report as part of your loan application, so you don’t want any nasty surprises later. Reviewing your credit report now will give you plenty of time to correct any errors. FinLocker has advice on disputing credit report errors inside the app.

Credit scores range from 300 to 850, with a higher credit score indicating a lower credit risk. While a credit score of 720 and higher is generally considered good and will help you obtain a lower interest rate, you can qualify for a home loan with a lower credit score. FinLocker recommends homebuyers achieve at least a 640 credit score to apply for a home loan.

Save for your down payment and closing costs

If your goal is to buy a home in 2021, you’ve probably looked at the price of homes listed in your preferred neighborhoods. Use the FinLocker Home Affordability Calculator to calculate a realistic purchase price that you can afford. The calculator will also estimate your costs to close (your down payment and closing costs), which should be a separate savings Goal in your FinLocker.

Automate your savings

Open a separate savings account, ideally one that pays interest, to save for your down payment and closing costs. Set up a direct deposit through your company’s payroll or auto-transfer a set amount each paycheck if the savings account is with your current bank. Resist the temptation of getting a debit card for the savings account. If your savings account is less accessible, you are more likely to leave that account untouched.

Enroll your new savings account in your FinLocker to see the account balance grow.

Set alerts to pay your bills on time

One of the major contributing factors to your credit score is paying your bills on time. Your lender will want to see that you can pay your existing loans and bills on time before they finance your home purchase.

Sign up for email or text alerts for your credit cards, student loans, utilities, car loan, and other bills you pay regularly. Schedule payments to be deducted from your bank account after each paycheck is deposited to ensure your bills are paid on time. Some financial institutions or vendors may even give you a discount or a reduced interest rate for scheduling auto payments.

Calculate your debt-to-income ratio

Mortgage lenders want to be confident that you can afford to repay your home loan each month before they approve your loan application. One of the areas they review is your debt-to-income ratio (DTI). FinLocker makes it easier to monitor your DTI when you enroll in Credit and connect your bank accounts and loans. Use the FinLocker Spending Analysis to see where your paycheck is going and identify unnecessary spending that you can cut back or eliminate.

Monitor your spending

If your DTI is above 45%, you need to monitor your spending, stop relying on your credit cards to meet your expenses, and start living within your household budget.

FinLocker users can create a budget for their regular household expenses, receive notifications for staying on track, and alert when they’ve gone over budget each month.

Use the FinLocker Spending Analysis to see where you can make savings to start paying down your debts. Can you change your cable/internet plan to one with minimal service, or cut your cable subscription entirely and replace them with a couple of streaming services?

Don’t take on new debt

Don’t be tempted to open a credit card to purchase furniture for a home you haven’t bought. Opening new credit accounts, or being a co-borrower on a loan, may hurt your chances of getting a good mortgage rate. Even transferring a balance from a high-interest credit card to a card with an introductory 0% offer can negatively impact your credit score.

Improve your credit score by paying down the balance of your oldest credit card. Even after you’ve paid off the card, charge a manageable amount each month to keep the account active. Credit history has a moderate impact on your credit score, and lenders want to see that you have a history of being responsible with various types of credit.

Reduce clutter by selling unwanted stuff

Take an honest evaluation of the stuff you don’t use or need around your home. Challenge every family member to identify five items such as clothes, shoes, toys, sporting equipment, etc. that no longer fits or isn’t used. Identify the most appropriate selling apps, then take a photo of the item with your phone, post a description, and sell your items. Split the profit 50/50 for each item your kids donated, and use the remaining money to pay down debt or add to your savings account.

Keep selling until you’ve reduced your unwanted items. You’ll have reduced the clutter around your current home and made it easier to move when the time comes to buy your new home.

Start gathering your documentation

Whether you are buying your first home or selling a home and buying a new home, there is a basic set of documents that all mortgage lenders will require for your loan application. Start gathering the documents now, and upload them to be stored securely in the Document folders in your FinLocker. When the time come to apply for a loan, you’ll be able to select which documents to share with your lender, and transfer them securely for your loan application.

Income

  • Pay stubs covering the past two pay periods or 30 days
  • Leave and Earnings Statement (military)
  • Past two years’ W2s
  • Federal tax returns for the past 2 years, if you are self-employed, own a business, a commissioned employee (25% or higher), an employee with unreimbursed business expenses or real estate income.
  • Divorce decree and settlement paperwork for separate maintenance (if applicable)

Assets

  • Statements covering 60 days for checking and savings accounts, investment and retirement accounts. FinLocker users can transfer accounts connected in their locker to their lender for asset verification.
  • Information for real estate already owned (use, income, if it’s on the market, estimated value, mortgages)

Credit/Liabilities

  • An explanation for credit mishaps. Bankruptcy and discharge paperwork (if applicable)
  • Divorce decree and settlement paperwork for child or spousal support expenses (if applicable)
  • Documentation disproving any erroneous items on your credit report

Personal Documentation

  • Driver’s license
  • Social security number
  • Certificate of Eligibility (military)

Reconsider renewing your lease

If you are currently renting, review your lease for an “early termination” clause and compare any costs of changing to a month-to-month or six-month lease when the time comes to renew. If you love the home you currently rent, you could even make your landlord an offer to buy the property.

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