Baby Steps Toward Home Ownership

First comes better credit. Then, a mortgage?

National Journal
Nancy Cook
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Nancy Cook
Feb. 19, 2015, 7 p.m.

Like many Amer­ic­ans, John Corb­in racked up cred­it card debt pur­chas­ing small splurges that were just out­side off his budget. “I kind of spent money that I didn’t have,” says Corb­in, who works as a su­per­visor at a man­u­fac­tur­ing fa­cil­ity in North Car­o­lina. Even­tu­ally, Corb­in’s cred­it card bills hit $2,500, with a 30 per­cent in­terest rate. That rate seemed like a massive head­ache (not to men­tion an ad­ded ex­pense) — that is, un­til Corb­in dis­covered that he could re­fin­ance his cred­it card loan through a loc­al cred­it uni­on and pay a much lower in­terest rate of 8 or 9 per­cent.

It took Corb­in about a year to pay off the $2,500 plus in­terest. The slow, steady pay­ment sched­ule not only bolstered his cred­it score, but it also paved the way for him to ap­ply for an even big­ger loan: a home mort­gage. Now, Corb­in owns a place in Can­ton, just out­side of Ashville and near the moun­tains. And his mort­gage? Well, that came from the same North Car­o­lina cred­it uni­on, called Self-Help.

Self-Help, foun­ded in 1980, is a com­munity de­vel­op­ment lender that tries to help low- to mod­er­ate-in­come people build up wealth and as­sets — wheth­er through bol­ster­ing cred­it scores, se­cur­ing auto loans, or ob­tain­ing mort­gages. Headquartered in Durham, N.C., the cred­it uni­on net­work has provided more than $6.4 bil­lion in fin­an­cing to roughly 87,000 busi­nesses and in­di­vidu­als that tra­di­tion­al banks and fin­an­cial in­sti­tu­tions of­ten ig­nore. Self-Help works in North Car­o­lina, Cali­for­nia, and Chica­go to of­fer fin­an­cial products and as­sist­ance for people try­ing to get ahead.

“Provid­ing good fin­an­cial ser­vices can make a huge dif­fer­ence in people’s lives, es­pe­cially with home own­er­ship,” says Uri­ah King, the group’s spe­cial pro­jects of­ficer. “We want to provide a mean­ing­ful tool to help people pay down debt and save.”

Hous­ing policy ex­perts and eco­nom­ists largely agree that buy­ing a home re­mains one of the best ways for Amer­ic­ans to save money. But many people need to take baby steps to ap­proach that goal. First, they need to learn how to ac­cess and use cred­it wisely. Self-Help cre­ated two fin­an­cial products to help them do that: The Cred­it Build­er and Wealth Build­er loans, both of which are meant as in­ter­im moves to­ward big­ger fin­an­cial goals.

The Cred­it Build­er loan, also called Fresh Start, was ori­gin­ally de­signed for people who’ve nev­er re­ceived a loan, or who suf­fer from ter­rible cred­it. It al­lows con­sumers to bor­row $500 over a 12-month peri­od with a low in­terest rate. In­stead of just hand­ing the con­sumers $500 dir­ectly, Self-Help places it in a sav­ings ac­count. The con­sumer pays off the loan month-by-month, as Self-Help re­ports the pay­ments to the cred­it bur­eaus. Once the loan is en­tirely re­paid, the con­sumer then re­ceives the $500 plus in­terest from the sav­ings ac­count.

The end product ac­com­plishes two goals: first, the con­sumer builds up a cred­it his­tory and secondly, she saves $500 in the pro­cess. “If someone comes in with zero cred­it his­tory, he can see his cred­it score jump to 650,” says Jean­nine Es­posito, man­ager of com­munity en­gage­ment at Self-Help Fed­er­al, about the Cred­it Build­er loan. “And if someone has bad cred­it, maybe they’ll see an in­crease of 20 to 30 points, de­pend­ing on people’s situ­ations and if they pay the loans back.”

The second type of fin­an­cial product that Self-Help of­fers as a baby step to­ward ac­cess­ing great­er cred­it is the Wealth Build­er loan — the same one that Corb­in used to re­fin­ance his high-in­terest debt. Wealth Build­er al­lows con­sumers to re­fin­ance ex­ist­ing high-cost con­sumer debt at a lower in­terest rate, while also build­ing up sav­ings. As con­sumers pay off the Self-Help re­fin­anced loan, a por­tion of their pay­ments goes in­to a sav­ings ac­count. Once the loan is fully re­paid, the con­sumer re­ceives the money from the sav­ings ac­count. (The amount of sav­ings var­ies, de­pend­ing on how much the con­sumer bor­rowed). The Met­Life Found­a­tion partnered with Self-Help to give an ad­di­tion­al $100 to every cus­tom­er who suc­cess­fully pays off a Wealth Build­er loan.

At the end of the re­pay­ment sched­ule, con­sumers have at least $300 in sav­ings. The hope is that that cash will provide enough of a fin­an­cial cush­ion so that con­sumers don’t have to con­tin­ue to lean on high-in­terest cred­it cards or per­son­al fin­ance com­pan­ies as a stop­gap. “Most high-cost lenders are heav­ily de­pend­ent on a re­l­at­ively small per­cent­age of bor­row­ers us­ing them over and over again,” says King. The Wealth Build­er loan tries to dis­rupt that pat­tern.

The max­im­um loan is $7,500 for in­di­vidu­als and $10,000 for fam­il­ies, to be re­paid over 24 to 48 months, de­pend­ing on the size of the loan.

Self-Help star­ted the Wealth Build­er loan pro­ject in 2013 and ex­pan­ded it statewide the fol­low­ing year, after the cred­it uni­on real­ized that too many of its con­sumers were saddled with high-cost loans. “We were say­ing, ‘You could have got­ten that loan from us for 9 per­cent,’ ” says King. “People were not see­ing the cred­it uni­on as a primary lender. Part of it was that they thought they would get denied the loan, and some of it was just in­er­tia. They were used to bor­row­ing on high-cost cred­it cards or per­son­al fin­ance com­pan­ies.”

Both the Cred­it Build­er and Wealth Build­er fin­an­cial products are too new for Self-Help to have any lon­git­ud­in­al data on the products’ po­ten­tial pit­falls and suc­cesses. But an­ec­dot­ally, says King, the cred­it uni­on is see­ing cus­tom­ers be­ne­fit from the new loans. (Even among con­sumers with very poor cred­it, King says that Self-Help is not ex­per­i­en­cing losses on its Wealth Build­er loans. “We have iden­ti­fied folks where the mar­ket is over­stat­ing the risks,” he adds).

So far, Self-Help has awar­ded roughly 3,700 Cred­it Build­er and Wealth Build­er loans, which add up to some $3.8 mil­lion in lend­ing, says Dav­id Beck, Self-Help’s Policy and Me­dia Dir­ect­or. Self-Help wants to help con­sumers real­ize that cred­it — like a home, car, or stock — is an as­set. The bet­ter your cred­it, the easi­er time you have reach­ing more am­bi­tious fin­an­cial goals such as buy­ing a home. “When you build your cred­it, you build your wealth,” Es­posito adds. “People’s fin­an­cial goals may be dif­fer­ent, but we want to help put them on a path to­ward great­er eco­nom­ic se­cur­ity and to give them a low cost, re­spons­ible loan to help them get there.”

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