Ever since I was 19 years old, I have rented many different rooms and apartments, ranging from a cold water flat in a squalid Denver neighborhood ($36 a week) to a walk-up in Manhattan's Upper West Side (a steal at $1,200 a month). I never thought about home ownership--I was too busy starving, writing and taking in the wonders of our world to do anything so bourgeois. But, when I stop to do the math, it's an inescapable fact that after all these paltry hand-to-mouth years, I have forked over about $35,000 for the privilege of having a roof over my head.
I've never seen $35,000 in one place, but if I'd bought a home back then, that sum would be under my house, as a bedrock all my own, called equity. Even I, a careless, ill-planning sort, am moved by such elementary number crunching; clearly, I should look into buying a home. Mortgage rates are appealingly low right now, with come-hither figures under 7 percent twinkling from the real estate pages. However, there are numerous obstacles to my prospective homeownership. For starters, I make my living one table at a time in a Durham restaurant (and one article at a time as a freelance writer), so my income is both modest and unpredictable. Furthermore, my credit report still suffers from the loose living of my younger days, and my savings are minimal. But the story only begins here, because there is vast alternate universe of credit, some of it reputable, some of it not, that can help marginal borrowers become homeowners.
If anything, the problems of the poor are compounded not by lack of access to credit, but too much access to credit that is usurious. Billboard ads that shout, "Bad credit? No credit? No problem!" are almost always offering loans on terms that watchdog groups call "predatory." For someone like me, who has no money but is educated enough to be hip to the song and dance of the predatory lenders, it seems that there are no credit sources that are both safe and accessible.
Anyone looking into this market for the first time can sign up for the three day seminars offered every month by the Durham Affordable Housing Coalition (DAHC). These classes, which are offered free of charge, cover such topics as finding credit, predatory lending, the intricacies of the contract closing process and home maintenance. "People say, 'Oh, you need a whole lot of money to afford a house.' That is simply not true!" says DAHC counselor Angella Coleman. Coleman, whose agency is contracted with the city of Durham for the express purpose of helping low-to-moderate income people purchase homes, says that the DAHC provides counseling for people with shaky credit histories. But first, Coleman stresses, "get a copy of your credit report."
Prospective homeowners can also turn to the Self Help Credit Union. In fact, Durham realtor Earl Mosher tells me, "If anyone feels they can not afford a house, the first call they should make is to Self Help." Indeed, the Durham-based nonprofit has made it its business to battle abusive lending practices on the one hand, and to offer credit to carefully selected borrowers who have been shut out of more traditional sources of capital. Meeting me in his downtown Durham office, communications director Malcolm White says that "Self Help is a civil rights organization whose mission is to bring into the economic arena advances that were made in the civil rights era." White recalls the bad old days when people of modest means had no access to credit, and were subjected to the merciless, one-size-fits-all Beacon rating system, "you either had the Beacon score for a loan, or you didn't."
Those who fare poorly by such yardsticks, as I would, may find relief at Self Help. "What we do is dig a little deeper and find out the reasons for the score," White continues. "We'll ask more questions, get more documentation--it is our mission to expand home ownership." However, Self Help is not Santa Claus. They examine their applicants closely, and this circumspection has paid off--White notes that their default rate of one percent "is no better or worse than banks." White says that Self Help "seeks out the same people that the predatory lenders seek out," but adds that his organization is not in the business of lending to people who will not be able to handle the debt load.
People who represent greater risks to lenders have to pay more for the privilege of credit, and Self Help is no exception. Because Self Help's loans are costlier, they are called, counterintuitively, "subprime" loans. Although "subprime" is a term frequently associated with predatory lending practices, the word is, in fact, a neutral one, denoting all loans that carry higher interest rates, whether they be usurious or not.
Self Help has been one of the nation's most vociferous and effective opponents of predatory lending, and White notes that in 1999, the North Carolina legislature passed a landmark bill against abusive lending practices, which included a ban on selling the notoriously expensive, utterly useless policy known as single premium credit insurance. (The bill's chief lobbyist was none other than the founder and CEO of Self Help, Martin Eakes.) The North Carolina law was a nationally noted event, and last year, such major lending institutions as Citigroup and Household Finance became fearful that their association with predatory lending would besmirch their reputations, and stopped selling this policy everywhere else in the country.
Although North Carolinians in search of a mortgage no longer need to fend off this "insurance," White emphasizes that there are still many ways in which borrowers, who are often all too grateful to be getting credit, can be exploited. "When you buy your first house, you'll sign 30 pieces of paper. I'll defy you to understand everything you're signing. It's very important to have your own lawyer, but lots of low income people can't afford lawyers."
Without expert advice, borrowers might fall for souped-up loans that include hidden, onerous costs that will not be apparent to the untrained eye. Some loans can offer seductively low monthly payments, amortized over 30 years, but will contain a balloon payment for the entire balance of the loan, due in year five, or seven, or 10. Such loans never use the word "balloon"--instead, according to White, "the way they're sold is that you'll reduce your upfront expenses. Many times the borrowers have no idea about the balloon payment," White notes, however, that balloon payment arrangements can be useful if the borrower knows that the property will be sold again well in advance of the required lump payment.
That prospective borrowers should understand exactly what they are getting into might seem too obvious to mention. However, White says, "it's very odd--there is a level of trust a borrower brings to a closing that doesn't exist in any other business transaction they ever do, but this is the biggest one!" In this atmosphere of trust, a naive, undercounseled borrower might sign off on a provision like "mandatory arbitration," in which the parties agree that the disputes will be handled by a third party arbitrator. Unfortunately, these seemingly harmless agreements mean nothing less than the buyer waiving his right to sue. Making matters worse, the lender chooses the arbitrator and "he just may live in Wyoming somewhere," White says. Fortunately, prospective borrowers who aren't already working with a lender like Self Help can seek out counseling at DAHC if they have doubts about the terms of a prospective mortgage, says Angella Coleman. "If you're not sure, please schedule an appointment with us, and we'll go over it," she implores.
Organizations like Self Help and DAHC are not the only alternatives for low-to-moderate income borrowers. For example, the North Carolina Housing Finance Agency backs FHA loans to first-time homebuyers made by partnering lending institutions, and the lending rate last week was 6.125 percent for a 30-year mortgage. Margaret Matrone, the agency's manager of corporate and legislative communications, says that to qualify, the first-time buyer must have an income of not more than $55,000, a rather generous ceiling (for a two-person household, the maximum is $58,000; for three persons, $60,000).
Furthermore, the NCFHA backs zero interest loans of up to $5,000 for down payment assistance, and even here, the income restrictions are surprisingly loose: $38,000 or less for a single person household, $54,400 for a family of four. (Matrone notes that the NCFHA doesn't deal directly with consumers--instead, they work with participating retail lenders, who can be found on the agency's Web site, www.nchfa.com.) The city of Durham also provides down payment assistance of up to $20,000, which can be used in conjunction with a loan from NCFHA, according to the DAHC's Coleman. Help is also available elsewhere in the Triangle--in Chapel Hill, for example, private nonprofits such as Empowerment Inc. and Orange Community Housing and Land Trust work to provide affordable housing in that community's notoriously tight real estate market.
For all of the lending assistance that's out there, some families are so strapped for cash that they will never be able to muster the $600 a month or so that is required to make payments on extremely modest homes. However, people in these seemingly hopeless financial predicaments can turn to Habitat for Humanity, which builds homes for the working poor with a combination of sweat equity from the prospective homeowners and extraordinarily generous loan terms.
As for me, I won't be buying a home anytime soon--I've learned enough to know that I've got to keep hacking at my credit card debt, save more money and continue my recently acquired habit of paying my bills on time. For starters. However, there surely will be other tricks for me to learn if I want to ever own a home. If I've been alarmingly inattentive to many of my personal obligations over the years, then, in my defense, I can point to the one bill I've always made sure to pay: my rent. It's always been easier for me to sleep on beaches, sidewalks, cargo boats and Greyhound buses when I knew I had a home to return to. Perhaps that will count for something with the lenders of my future.