Home Buying 101
The way Tim Monzello sees it, buying your first home is a lot like being a new parent.
“You’re going into both experiences blind,” said Monzello, 34, who recently moved into his first home in Asuza and has an 8-year-old son. “You’re hungry for any information that will make you a better home buyer or parent,” he added.
Before they bought their three-bedroom, $130,000 home, he and his wife, Karen, 31, gathered all the information they could on what they consider the most important purchase they’ll ever make.
A critical part of their research included attending classes for new home buyers.
Usually given by mortgage lenders, real estate agents and various nonprofit groups, new home-buyer classes are held throughout Southern California and across the United States.
The classes are designed to better educate consumers about the home-buying process and the responsibilities of home ownership, with the goal of reducing home loan defaults.
Depending on lender requirements, the classes can be mandatory for prospective homebuyers who want to qualify for loans of 5% down or less. Students are often given financial incentives for attending the class, such as down payment or closing cost assistance.
Given in a variety of formats, the classes are usually four to eight hours in length and held on Saturdays or in the evenings, although home study is sometimes available.
There are no rigid guidelines as to how the classes should be structured, but when finished, attendees must be proficient in how to shop for a home, how to obtain a mortgage and the responsibilities of homeownership.
The concept of home-buyers classes was devised in 1989 when Fannie Mae made a commitment to make homeownership more available to low- and moderate-income renters. Fannie Mae teamed up with several mortgage insurance companies, including GE Capital Mortgage Insurance Corp. in Raleigh, N.C.
“In return for educating consumers about homeownership, we felt we could be more flexible in terms of underwriting guidelines,” said Mike Kachel, spokesman for GE Capital.
“The home-buyers classes are designed to teach homeowners not to overextend themselves and not to purchase a home with hidden problems. So far, our portfolio of these loans has been profitable and [has] proven that education does work.”
In 1990, the home-buyers classes became available nationally and since then more than 300,000 families have benefited from the program, said Julie Gould, vice president for housing impact for Fannie Mae in Washington, D.C.
Over the last five years in the Los Angeles area alone, homes worth $3.3 billion have been sold to low- and moderate-income buyers, said Barbara Sandoval, deputy director of the Los Angeles Partnership office of Fannie Mae.
The Monzellos attended their home-buyers class at the suggestion of their real estate agent, Jim Malone.
“I refer all my first-time home buyers to the classes,” said Malone, who is with Ken Turner Real Estate in Glendora. “The program saves them money and gives them valuable information about homeownership.”
To prospective home buyers like the Monzellos who take advantage of the classes, the sessions help simplify what is often seen as a confusing and daunting process.
“We had talked to people about buying a home, but until we went to our first home-buying seminar and got an idea of what was really involved, it was a nebulous process in our minds,” said Tim Monzello, who attended his first home-buyers session in June 1996, and another four months later.
“Once we went to a home-buyers class, we didn’t feel like we were going into [home buying] blind anymore,” he said. “We had an understanding of things like credit needs, budgeting and the timeline involved in a loan.”
In the classes, experts discuss qualifying for a loan, covering issues such as how much house a buyer can realistically afford, the down payment, minimum income requirements, budgeting and how credit affects loan approval. Class participants also learn how the loan process works, including definitions of terms such as appraisal, escrow, underwriting, title and closing.
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The typical person or couple attending a seminar is a year or two away from buying a home, said Ginger Bengochea, director of counseling and housing for Santa Ana-based Consumer Credit Counseling Service (CCCS) of Orange County.
A nationwide nonprofit agency that provides money management and debt counseling, CCCS has teamed up with Chase Manhattan Mortgage Corp. to provide free home-buying sessions throughout the United States.
By educating prospective homebuyers, “we’re trying to present alternatives to foreclosure classes, which are usually really well-attended,” Bengochea said.
“Most new home buyers could benefit from the class because home buying isn’t a skill that is taught in school,” said Cora Fulmore, director of housing for the National Foundation for Consumer Credit, in Silver Spring, Md., the national arm of CCCS.
“Although many prospective home buyers are college-educated, they don’t have a mortgage background. I bought my first house in 1980 when interest rates were high. Not knowing about the process and just happy to have a home, I signed loan papers for a negative amortization loan at 16%.” (With a “neg am” loan, the balance can actually increase because the payments do not cover interest on the loan.)
According to Fulmore, her story isn’t unique.
“Most people require some guidance,” she said. “They often have no idea how much money they need to become a homeowner and then how to budget in order to save the necessary amount.”
Two common myths quickly dispelled at home-buyers seminars involve the amount of money needed for a down payment and the amount and type of credit required.
“There are many mortgage programs that require a small down payment,” Fulmore said. “‘Another common misconception is that you have to have a lot of credit and it must be squeaky clean.
“Potential home buyers become immobilized by such myths when they could be taking the first steps toward homeownership.”
For the Monzellos, buying their own home was something they thought they could only dream about, said Karen Monzello, 31, a stay-at-home mom.
“Tim and I would see new houses being built and talk about what we’d like to have in a home, but for a long time we didn’t have much hope,” she said. “We used to think we would need at least $15,000 to $20,000 to buy a home and it would take us forever to save that kind of money.”
The Monzellos were pleasantly surprised at the first home-buyers class they attended.
“We found out there are many good programs with much lower down payments, like the $7,000 we paid,” Karen Monzello said. “After that first class we were much more hopeful.”
Credit is another area where potential homeowners have a lot of questions and few correct answers, said Carmen Luna, community development officer with Chase Manhattan Mortgage Corp. in La Jolla, a subsidiary of Chase Manhattan Bank.
“The most popular part of the class is often the credit session,” she said. “People are ignorant about how much credit you must have to buy a home and how lenders look at credit. The home-buyers session reveals what types of debts listed on the credit report are taken into account during loan-application processing.”
Attendees are also warned that there are often mistakes on credit reports that can hurt a loan’s chances. Participants are urged to get a copy of their credit report before applying for a loan.
After attending their first class, the Monzellos sent for the free credit report that TRW used to offer and found that it listed three hospital bills that had been paid but were listed as unpaid.
“It was a good feeling to get those hospital charges removed,” said Karen Monzello, who noted that an inspection of their credit report also led them to apply for a few credit cards to build more credit.
Many class participants are also relieved to hear that a credit record needn’t be squeaky clean.
“Things happen to people in life, and as a lender we understand that,” said Suzy Dukelow, a Newport Beach-based loan officer for Chase Manhattan Mortgage, who spoke at a recent new home-buyers session in Mission Viejo.
“People lose jobs and experience debilitating illnesses, so we look at each situation individually,” she said. “If, for example, you have good credit, except for a period in 1993 when you had several late payments because you lost a job, we aren’t going to turn you down because of those late payments.”
Class participants also learn that by law they can offer an explanation after a negative comment on their credit report. “The more information we have, the better,” Dukelow said.
Some students with blemished credit discover they are better off waiting to apply for a loan. “Most people can clean up their credit in six to eight months, then apply and get a good loan, as opposed to getting a costly loan with bad credit,” Luna said.
With the dream of homeownership in mind, Chris, who lives in Newport Beach and who asked that her last name not be used, began cleaning up her credit three years ago with the help of CCCS.
Chris began charging her lifestyle on credit cards after college when she lived on her own in a metropolitan city.
“I was a small-town girl, and using credit snuck up on me,” she said. “Being of integrity, I always had intentions of catching up on my bills; however, high interest rates, lack of landing ‘that great job’ and time proved me wrong.
“I shopped for clothes, ate at the finest restaurants, went to a lot of clubs and traveled. These were luxuries I felt I deserved and could afford.”
By 1993, Chris owed eight creditors about $5,000. With budgeting guidance from CCCS, she has paid off most of her bills. Today, she has just one credit card left to pay and uses cash for most expenses. Now that she is almost free from debt, her dream of owning a home in Southern California is a more likely reality.
Chris, who works for an express transportation company and lives in a studio apartment, feels ready for a home of her own, so she attended a Mission Viejo home-buyers session.
“The class provided a lot of really useful information,” she said. “For instance, I never knew what escrow was. I knew that people get nervous and antsy at that time, but I didn’t know what it meant. I also enjoyed the information on paying attention to closing statements to make sure that you aren’t charged any unnecessary fees.”
The Monzellos also appreciated the detailed information the classes provide.
“Although our Realtor was very helpful and glad to answer any questions, at first we didn’t even know what questions to ask,” Tim Monzello said. “The seminar helped to explain everything.”
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While the Monzellos never had credit problems, after attending their first home-buyers session in June 1996 and learning what it takes financially to own a home, they also adjusted their spending habits.
“After that class, we calculated our finances and determined how much house we could afford,” Karen Monzello said. “Then we cut expenses and started saving more money.”
To sock more into savings, the Monzellos made a few adjustments. Tim began bringing his lunch to work every day, they cut down on dining out and long car trips to visit family, and they slashed their gift budget. They also began scrutinizing their phone bill.
Now settled in their new home, they still have some concerns, but they feel like the home-buyers classes have made the transition much smoother.
“Although we’re a little scared about the responsibility of the mortgage and caring for a home, everything has fallen into place,” Karen Monzello said. “I think taking the home-buyers classes led us in the right direction to choose the perfect home.”
For information on new home buyers classes in your area, call Consumer Credit Counseling Service at (800) 388-2227 or Fannie Mae’s HomePath hotline at (800) 732-6643.
