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Lessons Learned From the Great Wealth Wipe-Out

by Alonzo. on September 5, 2011

The recent foreclosure crisis sucked over 371 billion dollars of wealth from communities of color, and nearly 8% of African-Americans lost their homes.

Here are four lessons new home buyers can take away from the mortgage meltdown that will prevent their home ownership dreams from going up in flames.

Know Your Credit Worthiness

If you don’t know your creditworthiness, you’re a sitting duck to unscrupulous mortgage lenders. As the Wall Street Journal noted:

“An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.”

Mortgage brokers steered homeowners with high quality credit toward risky sub-prime mortgages designed for borrowers with the worst credit.

As a result, many African-American borrowers were trapped by unnecessarily high interest rates that ultimately led them to default on their mortgages.

With knowledge of your credit score and an understanding of the type of loan terms you qualify for, you’ll avoid the trap.

Don’t Let Your Mortgage Lender Set Your Expectations

Just because you’re approved for a $300,000 loan doesn’t mean you can afford a $300,000 loan. Your lender is looking to make the most money possible. They’re not necessarily concerned about a mortgage that leaves you with breathing room in your budget.

Understand Your Complete Cost of Home Ownership

Many couples stretch their budget to afford an over-sized mortgage. But soon they realize the mortgage is only a small part of home ownership. Add in property insurance, property taxes, utilities and maintenance, and the costs quickly escalate. Financial experts estimate that home ownership will cost you 40% to 45% more in addition to the mortgage. If your mortgage runs $1000 a month, then expect to spend $1400 to $1450 a month on total ownership costs.

Don’t Be Afraid To Start Small

Americans are an impatient bunch. Gone are the days of the starter home. Nowadays we jump right into the dream home. Yet starting out with a dream home can be a recipe for disaster.

Consider that the larger and more costly the home, the less likely you’ll be able to come up with the 20% down payment needed to avoid private mortgage insurance (PMI). PMI is required to protect lenders, but acts more like a hidden tax for those without enough money for an adequate down payment.

But stretching your budget to purchase a home sabotages your wealth building ability in more ways. Higher priced homes have higher priced insurance, property taxes, and maintenance costs.

They are usually more expensive to furnish, heat, and air condition. These so called sunk costs are necessary for you to keep your home, but they do little to create wealth. And when you’re just starting out, the higher sunk costs can be the lead weights that take you under.

Buying a home can be a great investment. But you must do your homework. Purchase a home that fits your budget and you’ll be well on your way to realizing the American Dream.

Photo Credit: Great Valley Center



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