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From Thomas Jefferson to Donald Trump, White men have shown that owning real estate is the cornerstone of wealth building in this country. It's the single largest investment any of us is likely to make, and property usually constitutes a person's greatest financial asset. During the last ten years, real estate has also proven to be the best investment for earning huge returns. Yet African-Americans lag behind Whites in home ownership by 26.2 percent. This is largely because of our history: For more than 300 years we were slaves in America, which by definition excluded us from owning anything at all. And even when we were freed and told we might receive 40 acres and a mule following the Civil War, it was a proposal soon undermined. Indeed, much of our history with land and property ownership in America has revolved around our seeing it stolen, burned to the ground, redlined or denied through blockbusting.

In this guide to home buying, we will give you the tools necessary for successfully staking your claim to those 40 acres--a metaphor in today's market for African-Americans buying real estate, whether a house, condo or rental property. We also profile four home owners who have used real estate to begin building their own portfolios of wealth and power.

THE POWER OF OWNING

In capitalist America, those who own always get more economic breaks than those who rent. There's the tax break, for starters. When you buy a home, you typically take out a mortgage loan to finance the purchase. Most of your monthly payback installments will consist of interest on that loan, and those interest payments are deductible from your gross income, thus lowering the amount of income on which you will be taxed at the end of the year. And the property itself represents collateral, which can be used to borrow more money in the future for anything from making home improvements to buying more property. The best part, though, is that the rising real-estate values over the past ten years have outperformed the stock market as an investment, with homes in many parts of the country selling for two and three times their original cost. (See wealth builder Tara Roberts's profile on the next page.) Finally, ownership gives a sense of power and permanence; you are the ruler of your own castle and not the pawn of a landlord. Think of rent as the money you give landlords to pay their mortgage. Think of your own mortgage as the money that gives you a springboard to financial empowerment.

FINDING THAT DOWN PAYMENT

If the thought of coming up with thousands of dollars for a down payment has kept you on the renter's fence, try mining these sources:

* IRAs and 401(k)s One of the few times you can tap these accounts without penalty before age 59 1/2 is for the first-time purchase of a home that will be your primary residence. You may not be hit with an early-withdrawal penalty, but you'll be taxed on the amount. Restrictions apply and rules vary depending on whether you're taking a loan or withdrawal from your account.

* Company credit unions Many companies have credit unions that offer their employees discounts on everything from car loans to mortgages. If you belong to a credit union, check to see if it will lend you money for a down payment or closing costs.

* Seller financing Often the owner of a property will "hold paper"--that is, finance a portion of the purchase for the buyer by not taking all the proceeds when the sale closes. Instead the seller may forgo the down payment or the closing costs and "lend" the money to the buyer, who pays it back with agreed-upon terms.

* Bank programs These plans can help with down payments. Wells Fargo, for example, features the National Homeownership Mortgage, which lets buyers obtain 100-percent financing if their FICO credit score is 620 or better. For details, see wellsfargo.com.

SAM'S HELPING HAND

We may not have received our 40 acres and a mule, but the government is apparently trying to make up with various initiatives:

* State Farm Insurance, Fannie Mae and Citigroup started the Student Homeownership Opportunity Program (SHOP), a workshop for students at Historically Black Colleges and Universities and community colleges. For more information, call (202) 263-2800 or visit cbcfinc.org.

* The Department of Housing and Urban Development (HUD) is proposing a "zero down payment mortgage" next year for Federal Housing Administration (FHA)-backed mortgages.

* HUD also sponsors The Teacher Next Door and The Officer Next Door programs. Call (800) 569-4287 or visit hud.gov/teacher.

GETTING THE LOAN

You've found the house you want at a price you can afford. Now you just have to be approved for a mortgage. According to Tonya Martin of First Merchants mortgage brokers in Brooklyn, banks or mortgage companies will consider these three areas when reviewing your application for a loan.

* Your income "Typically banks want no more than 34 percent of your gross monthly income going for debt servicing," says Martin. This means that the amount of your monthly mortgage, plus the taxes and insurance on the house (usually included in the monthly mortgage payment), should not be more than 34 percent of your gross monthly paycheck. If you make $50,000 annually, for example, the gross comes to $4,166.67 per month, and 34 percent of $4,166.67 is $1,416.67, so you may be able to carry a house that runs about $1,400 a month. This, however, ultimately depends on:

* Your other debts Banks will also look at other installment bills you pay monthly, such as credit cards, school loans and a car note, when evaluating you for a loan. In this instance they don't want your mortgage debt and other installment debt to be more than 40 percent of your gross monthly income. On a $4,166.67 gross monthly income, for example, total installment debt should not exceed $1,667 a month. So you may qualify for a house running $1,400 a month if your other debt doesn't exceed $267 a month. If it does, this will affect how much of a house loan you actually qualify for.

* Your credit rating This is just as critical as income in qualifying for a home loan, because your credit rating tells banks how good your record has been in making timely payments on other debts. "Credit-reporting agencies now attach a score to your credit rating," says Martin. "A score of 680 or above is considered good, and getting a loan should not be a problem if your credit rates this high. A score that's between 600 and 680 is considered fair, and may mean you will have to show other assets or put down more money to get financing. Any credit score under 600 is seen as poor. Financing isn't impossible, but you'll probably have to pay a higher interest rate or other fees to obtain the loan."

WHERE TO FIND DEALS

Even in today's red-hot real-estate market, there are house deals to be found. Here are some places to start looking:

* Foreclosures When banks or other financing sources take back a property, they usually want to sell it again as quickly as possible, often for a fraction of its real worth. Go to foreclosure.com to register for a list of foreclosed properties in your area.

* Public auctions If foreclosed properties aren't bought privately, they're put up for auction to the public. Your local newspaper will advertise available properties and auction dates and times. Keep in mind that if you win the bid on a property at an auction, you'll need at least 10 percent of the purchase price in a certified check at the time of the bid to secure it.

* Community programs Increasingly, African-American organizations in predominantly Black neighborhoods are developing real estate or renovating housing and selling it on favorable terms to area residents. The nonprofit status of such groups makes them eligible for grants and subsidies that can drastically reduce the cost of purchasing for first-time home buyers, though the red tape involved can make the process time-consuming. (See Darryl Benson's profile next page.) Find out which organizations in your neighborhood are financing housing ventures by calling churches, community-development corporations and civil-rights agencies.

BUYER BEWARE!

Real estate usually involves big money, which makes it ripe for scams. Watch out for these shady moves:

* Developer's glad-handing Many housing developers will offer to do everything for you from inspecting the property you're buying from them to financing the mortgage. But there's often a conflict of interest. Any inspection of the property should be done by a professional you've hired, independent of the developer. Compare rates and your eligibility with banks or mortgage companies before jumping at developer financing.

* Home-a-loan sharking "Hard money" or "shark" lenders prey on high-risk borrowers with ads that say things like, "Mortgage money guaranteed! Even with bad credit and no job!" What they don't say is that the interest rate on this money is exorbitant and sometimes illegal. Stay clear, and instead work on cleaning up your credit.

IT'S ALL ABOUT THE INTEREST RATE

Your income is crucial, and so is the price of the house, but interest rates are key to calculating how much you can afford: The higher the interest rate, the more it costs to pay for the loan. The lower the rate, the less it costs. Say you want to take out a $100,000, 30-year, fixed-rate mortgage loan. At today's prevailing rate of 6 percent, the payment on that $100,000 mortgage would be $599.55 a month. Suppose property taxes and insurance add $250 (actual amounts will vary, depending on the property), equaling $849.55 a month. At 9 percent, the rate a few years ago, your mortgage payment alone would have been $804.62, or $205.07 a month more than at 6 percent. At the lower interest rate, you can afford the mortgage, taxes and insurance for about the same cost of just the mortgage at the higher rate. With mortgage interest rates the lowest they've been in 40 years, houses have never been more affordable, which makes this a good time to buy, even with higher house prices.

TERMS TO KNOW

Mortgage A loan that is made against real estate, with the real estate serving as the collateral.

Equity The difference between the value of a property and what you owe on it. This reflects its market worth, not just what you've invested. For instance, if you put down $5,000 on a property that cost $100,000 but is now worth $125,000, you have $30,000 worth of equity in the property (the $5,000 you put in, plus the $25,000 rise in value).

Fixed rate The amount of interest you pay on a loan remains the same for the term of the loan.

Adjustable rate The amount of interest you pay on a loan remains the same for a temporary period of time (which could be anywhere from one to ten years), and then adjusts up or down annually, depending on other market indicators.

Points Another term for percent. A bank, for example, that's charging three points on a mortgage loan, is charging 3 percent.

PITI Refers to the four components of a monthly mortgage payment: principal and interest, taxes and insurance.

Escrow The amount of money a bank may collect from you and hold in reserve to pay the taxes and insurance on a property.

PMI If you put down less than 20 percent of the purchase price when buying property, banks may require you to take out private mortgage insurance, which indemnifies them from loss should you default on the mortgage.

Closing The last step in the home-buying process in which you receive the title to a property. Expect to pay closing costs that could run between 4 and 6 percent of the mortgage amount.

Wealth Builder TARA ROBERTS TURNING FORECLOSURE INTO FORTUNE

Eight years ago Atlanta magazine publisher Tara Roberts lived in New York City. She was determined to own a home, but had managed to scrape together only about $12,000 for a down payment. What could that possibly buy her in an expensive metropolis? Try a spacious three-bedroom cooperative apartment, with hardwood floors and a walk-in closet, that a real-estate broker showed her. Okay, so the Brooklyn neighborhood was marginal, and the building was a slightly shabby four-story walk-up, but you couldn't beat the price: It was in foreclosure, going for only $15,000. The previous owner had been evicted for nonpayment of maintenance fees, and the cooperative had taken the property back.

The snag: The co-op board was willing to sell the property for practically next to nothing, but it had to be an all-cash transaction, and Roberts was $3,000 short. The solution: The cooperative itself offered to finance her the $3,000 at an interest rate of 7 percent, payable in one year. By the time she had moved in and paid off the loan, the building, along with the neighborhood, had been spruced up considerably and real-estate prices in New York City were skyrocketing.

When Roberts sold her apartment in 2001, it went for a whopping $256,000, nearly 20 times what she had paid for it. Because it was her primary residence and she's single, she could make up to $250,000 in profit without having to pay capital-gains taxes. (Couples can make up to $500,000 in profits without paying capital gains.) She took part of the proceeds and paid off her college and grad-school loans, then moved back to her hometown of Atlanta, where she used the rest of the money to launch a magazine. Today, as publisher of Fierce, a multicultural publication for socially conscious women, Roberts, 34, says, "I've gotten so much more savvy about real estate now. My current place, a loft in downtown Atlanta, was appraised high enough that I was able to secure two lines of credit, letting me further finance my magazine."--A.E.

Wealth Builders LA-NITA AND KEITH THOMAS SECTION-8 RENTERS BECOME LANDLORDS

When La-Nita Thomas saw a For Rent sign in the window of a pretty house in Tacoma, Washington, seven years ago and called to inquire about it, the first thing the owner asked was if she'd he interested in buying it. He must be kidding, La-Nita thought. She and her husband, Keith, had been Section-8 renters, with three kids (daughter Chyna is pictured with her parents here), bad credit and little money. But they now had good jobs, which was enough for the owner, a real-estate investor who often extended creative financing for properties he sold.

In this case, he offered to sell the three-bedroom, two-bath house to La-Nita and Keith for $129,500 under a lease-option agreement. They would put up $1,500 as a partial down payment and rent the house for $1,100 a month for one year, with $500 a month of the rent going toward the down payment. After a year they would put down another $1,500, and the seller would hold a mortgage for seven years--during which time they had to find another source of financing. They got a new loan from a mortgage company within a year and paid off the seller.

Now bitten by the real-estate bug, La-Nita, 35, a surgical technologist, and Keith, 39, an inspector at Boeing, bought a second property for rental income in 1999 for $112,000. The seller of the first house held a second mortgage on this property, which he agreed to sell to the Thomases for $7,000. Keith tapped his company pension to buy out the seller's position. "His pension lost a lot of money when the stock market went down," La-Nita says, "so we figured that real estate was a better place to put it." Shortly after, the owner of the house, who owed the first mortgage and had retired to Montana, agreed to let La-Nita and Keith buy the house for what he owed the bank, $105,000. La-Nita and Keith assumed his loan, meaning they took over the payments and didn't have to come up with any more money than the $7,000 they originally paid.

Last year the Thomases traded up to a $250,000 six-bedroom home near the waterfront of Puget Sound. They raised the $15,000 down payment by refinancing their first home, which they now rent out. The seller of their new home paid all closing costs. Today they own three properties with an estimated total market value of $579,000 that cost them $10,000 out-of-pocket to acquire. The income from the two rental properties more than covers both those mortgages. In ten years the couple plans to leverage their holdings to finance their children's college education, and even think about retiring early.--A.E.

Wealth Builder DARRYL BENSON KING OF HIS CASTLE IN THE HOOD

Although he had put down money on a house in Queens, New York, Darryl Benson was blown away when he checked out another house a friend had told him about. Offered through a first-time home-buyers program in Brooklyn's predominantly Black Bedford-Stuyvesant, it was a majestic brick-and-limestone Italianate four-story, four-bedroom, two-family town house, gleaming like a polished jewel on a block of stately brownstones. The house had been an eyesore on the block for several years until the Bridge Street Development Corp. (BSDC), an affiliate of the Bridge Street African Wesleyan Methodist Episcopal Church, acquired the property from the city, did a stunning renovation and their offered it for sale to area residents through BSDC's home-buying program.

"I never thought I could get a property like that--I figured it would go to a sister in the choir," says Benson, 40, a corrections officer at Rikers Island prison, who quickly got his money back from the Queens house and applied for the Bedford-Stuyvesant house anyway.

Despite his doubts, Benson, who had lived rent-free for five years as a sexton at another church before moving into a rental apartment with his girlfriend, had managed to save about $50,000. When his girlfriend moved out to buy a house with her sister, Benson decided to buy a house for himself. Because he had a good job and good credit, he rose to the top of the list two years ago when Bridge Street started reviewing the applications of prospective buyers.

He was approved to buy the town house last year. It cost $360,000--discounted about 30 percent off its current market value of $520,000, giving him $160,000 in equity before he put out a penny, Benson put down $5,400, or 1.5 percent of the purchase price at the contract signing, and another $16,000 when he closed. His monthly payments come to $2,333 a month, but since he rents out the bottom floor studio apartment for $900 a month, he pays only $1,433 a month for the three floors he occupies in his 2,960 square-foot urban palace. "I'm a Brooklyn native and always wanted to own here," says this bachelor, who hints that he's now ready to have a queen join him in the castle.--A.E.

Audrey Edwards, a senior writer at ESSENCE, is also a New York State licensed real-estate broker. Her business, Plaza Properties, is located in Brooklyn.

Copyright (c) 2006
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