Money Train: Prospective Homebuyer Begins Journey

Money coach Alvin Hall is back to accept another listener who wants to board the Money Train. Gloria Ellis, of Missouri, receives advice about saving enough of her money to buy a house, and the latest news about the housing market.

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MICHEL MARTIN, host:

I'm Michel Martin, and this is TELL ME MORE from NPR News.

Coming up: an American jazz artist falls in love with Afro-Cuban music. He'll tell you why later in the program.

But first, it's time once again to climb aboard the Money Train. It's our special summer financial empowerment series where we're giving you the low down on debt management, starting a small business or buying a first home. Today, we're on the homeownership track.

Our conductor is finance guru, Alvin Hall. He joins us from his home in New York. And I'd also like to introduce Gloria Ellis, a finalist for the homeownership Money Train. She works in finance at a manufacturing plant in West Plains, Missouri. She would like to own a home, but she needs help preparing for that big step. Gloria joins us from her home in West Plains, Missouri.

Hi, Alvin. Hi, Gloria.

Ms. GLORIA ELLIS (Accountant): Hello. Thank you.

Mr. ALVIN HALL (Money Coach; Correspondent, MSN Money): Hello, Michel.

MARTIN: So, Alvin, before we talk about Gloria's specific situation and talking about listeners buying a first home in general, there is all kinds of turmoil in the housing finance industry. You know, one of the biggest mortgage lenders sort of withdrawing from the business. And you hear about - I think, the country's largest mortgage lender, Countrywide, having to tap a credit line in order to pay its obligations. What's going on here?

Mr. HALL: Over the past couple of years, since everybody's been buying houses and the demand for new houses as well as existing houses increased, more and more lenders were not doing the proper checks on the people they made the loans to. And they were offering mortgages with teaser rates. So for the first two years, you've got an incredibly good rate. But then for the next 28 years of a 30-year mortgage, the rates went up to, you know, 50 percent or 30 percent, depending upon what your teaser rate was.

So a lot of those people cannot afford to make the mortgage payments, and they're defaulting on their loans. And the companies that originated the loans now are watching us. The banks and everybody is tightening the credit, saying we want more qualifications. We want more income from the people applying for the loan. So gradually, the loan market for mortgages is drying up.

MARTIN: So the question now becomes for people like Gloria - who would like to buy a home - are they going to be able to get a mortgage?

Mr. HALL: It's going to be much harder now. And there are two reasons it's going to be much harder. One, they're going to demand more of a down payment, and they're going to do more detailed background checks, because this has just been, I think, a really shocking event to the industry at large.

MARTIN: But when you say they're going to be really tightening standards - and Gloria, we are going to come to you very shortly - I mean, isn't that - weren't those the standards that had been in place before? I mean, is it just a return to the past, or do you think there's another level of scrutiny, a new level of scrutiny that buyers are going to be subjected to?

Mr. HALL: If you look at who has been defaulting on mortgages, it's been largely poor people, African-Americans, Hispanic people trying to get on the property ladder. In reality, there may not be an element, but I think within the mentality of the people who make the loans, there is a new scrutiny so that generosity that may have been there before is being removed.

MARTIN: Well, all right. That's kind of a bracing message. Gloria, are you ready for this?

Ms. ELLIS: I think I am. Yes.

MARTIN: Okay. Well, Gloria sent us an e-mail as we have been, you know, asking our listeners if they're interested in getting help with the issues we talked about - debt rejection, buying a first home or starting a small business. And Gloria sent us a note, and this is what she said. She said I'm 27 years old, have no children, make approximately $68,000 a year. I'm interested in purchasing my first home, but I've become overwhelmed by the idea of how much money I need to save before I even start. Am I being too anxious, or is this a realistic expectation? Please help.

So, Alvin, let's help. So, Gloria, first of all, tell me why you want to buy a home?

Ms. ELLIS: As anyone, the American dream is to own your own home. But not only that, I feel like when I do purchase a home, it's a place that I can settle down and possibly start a family, possibly - just get my life moving towards some of my final goals. And I think the first step of that is to purchase a home.

MARTIN: Okay. So, Alvin, what should Gloria be thinking about? What other questions that she needs to be asking herself to start this off?

Mr. HALL: Well, I love what she said about, you know, setting up a family and putting down roots with this house. But in reality, she's 27 years old and she's at the beginning of her career, so she should view her first house as her first grab on the property ladder. So she should buy a house that's in a good location, one that she knows in a couple of years, three to five, she might be able to sell on and then move to a better house. So she needs to adjust her mindset that way, and she needs to go on to do some research in advance to see what kind of property she can get that would make her reasonably happy for that period of time.

MARTIN: Alvin, how much money do you think Gloria should be thinking about saving? Obviously, that would depend on what, you know, properties cost in her part of the country.

Mr. HALL: She should probably think about saving between 10 and 20 percent of the down payment. Ten percent is good, because then she'll get a decent mortgage rate on the property. And she needs to have money in the bank to cover the closing and the expenses on the property for at least six months after she buys the property. I think anything under 200,000 would be reasonable.

MARTIN: Gloria?

Ms. ELLIS: Yes. And that is my predicament: How do I save that much money? I have a decent credit score. I have very little credit card debt. I have student loan debt and a car loan that would be paid off in November. So how do I change my spending to save that much money in the amount of time that's reasonable, say five years? Because I'd like to buy my first home within the next…

Mr. HALL: Five years is a great period of time in which to do this. What you need to do is to set yourself a very tight budget. I know you probably - being 27, I know you probably like to shop.

(Soundbite of laughter)

Mr. HALL: I know you probably like to take nice holidays, correct?

Ms. ELLIS: Yes. I do.

Mr. HALL: Yes. You need to start pulling back on some of that and decide which holiday is the most important rather than taking several. And reduce the amount of shopping that you do and start putting money into the bank, just saving it. That's all you need to do is save the money, and then put it into a high interest-bearing account, and then roll it over in CDs. I would not suggest that you put your money in the stock market right now because of the turmoil that's going there. But instead, just roll it over into CDs and give yourself a fixed time schedule. You said five years?

Ms. ELLIS: Yes.

Mr. HALL: And you want to put $40,000 in the bank during that period of time?

Ms. ELLIS: Ideally, yes.

Mr. HALL: So start from five years from today and go backwards and calculate how much you need to put away every single month for that period of time and cut your budget appropriately, and you'll be able to do it.

MARTIN: And that sounds good. Gloria, how does all these sound to you?

Ms. ELLIS: I'm very optimistic about it. So this gives me a new perspective on things, so I'm excited.

MARTIN: When are you going to start?

Ms. ELLIS: As soon as possible.

(Soundbite of laughter)

Mr. HALL: What do you have to give up in order to make - to give yourself a quick a quick start, Gloria?

Ms. ELLIS: Traveling. That will be the largest cut back for me.

Mr. HALL: And all you have to do is to choose which trips are most important to you, prioritize them, and maybe all you need to do is to cut one or one and a half trips and you will get there faster than you think. It's important to chase the highest interest rate on the savings account.

MARTIN: All right. Well, that sounds good. Gloria, will you check back with us to let us know how you're doing?

Ms. ELLIS: Absolutely. Yeah.

MARTIN: All right. Alvin, any final thoughts for people who might be discouraged about what they see going on in the financial markets right now?

Mr. HALL: Yes. Don't be totally discouraged. On the Internet, there is a calculator called the rent/buy calculator. It tells you whether the rent you're paying is reasonable for your area. I like that calculator, because everybody thinks that renting is bad. Sometimes it's best to rent. You don't have the responsibility of taxes and maintenance. You don't have all of those outlays that come with owning property. Rent. Save your money. Cut back on your spending and then sit there with the money in the bank so you can pounce when a good opportunity comes along, which is exactly what I did.

MARTIN: All right. Alvin Hall is the conductor of our Money Train financial series. He joined us from his home office in New York. Gloria Ellis works in finance at a manufacturing plant. She joined us from her home in West Plains, Missouri.

You can post comments on our Web site, and we always love to hear from you at npr.org/tellmemore. And thank you both so much.

Ms. ELLIS: Thank you. Bye.

Mr. HALL: Thank you, Michel.

MARTIN: And good luck, Gloria.

Ms. ELLIS: Thank you.

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