You're going to need a loan someday. No matter how much cash in tips, Chinook Book coupons and coffee-shop punch cards you've stashed in your mattress, when it comes to buying a house or starting a business, almost no one can go with cash in hand. You might have heard traditional lenders have been close-fisted with the billions in bailout money they got a few years back. Fret not, prospective homebuyers and entrepreneurs, there are plenty of borrowing opportunities available.
With interest rates and home prices low, it's a great time to be a first-time homebuyer, says Michelle Puggarana, program director with the nonprofit Portland Housing Center (282-7744, portlandhousingcenter.org). But beware that "buying a home is a really complicated and [potentially] overwhelming experience," she says.
Puggarana's top tip for home-loan seekers is to get help—if not from her organization, then from a federally approved housing-counseling agency. Housing counselors look at your big-picture financial situation to help compare your borrowing options and determine eligibility for loans, including first-time homebuyer and down-payment assistance programs offered by government agencies, nonprofits and financial institutions.
First-time homebuyer programs typically offer mortgages at lower-than-market interest rates for people who haven't owned a home in at least three years and earn less than a certain amount. (It's higher than you might think, Puggarana notes.) Down-payment assistance programs provide people whose household income is no higher than 80 percent of the area median (that is, no higher than $58,400 for a household of four in Portland) with savings matches, grants and loans to defray the upfront costs that commonly bar first-time homebuyers.
Regardless of how you get a home loan, Puggarana says you should try to secure the most conservative kind: one with a 30-year term and a fixed interest rate. You should also be more conservative than the lending industry in deciding whether you can afford the monthly payment. While the industry standard is that the prospective borrower's total debt payments, including the mortgage, should be no more than 45 percent of her income, Puggarana says about 41 percent is a less risky guideline.
"If somebody loses their job or has a reduction in their work hours, that can have a pretty big impact when 45 percent of your income is going toward debt," she says. "We really encourage people to make sure that they're also building in a cushion."
What about your food-cart idea? Getting a loan for a business concept (it is a food cart, isn't it?) also often means hitting up a bank or credit union. Rachel Stein, a loan officer at Mercy Corps' local community-development arm, Mercy Corps Northwest (896-5070, mercycorpsnw.org), says although traditional lenders are more risk-averse than they used to be, and most aren't loaning to start-ups, their positions are shifting with the economy and no two institutions are alike. "You never know what they might have for you," she says.
If you don't qualify for a loan from a bank or credit union, Stein says, your options depend on factors including the industry, loan amount and neighborhood. Some public agencies, such as the Portland Development Commission, offer loans to would-be entrepreneurs who are ineligible for traditional financing. They usually target particular business sectors or geographical areas, which might mean compromising your vision.
Mercy Corps NW offers loans between $500 and $20,000 for start-ups, and other community-development institutions offer greater amounts. Mercy Corps NW's loans carry a higher interest rate than ones from banks (reflecting the higher risk of the loans it makes), but the organization, like many alternative lenders, takes a more nuanced view of applicants' credit scores, even lending to people who previously have been foreclosed on or declared bankruptcy.
In considering any loan, Stein recommends looking at not only the interest rate, but also the amortization schedule (which breaks down the amount you would pay in principal and interest each month), whether you would be allowed to pay off the loan early, the support available should you have trouble making payments and the fees associated with the loan. Last but not least, Stein says borrowers should feel good about their lender. "As a small-business owner, it's really important that you forge a positive relationship with your financial institution," she says. "It's important that you trust your banker and want to work with him or her.â
Credit reports are a grown-up's permanent record. Most people understand that a positive credit history is crucial to buying a house, starting a business or maybe even getting a job. But a lot of them think building good credit is a simple matter of paying your bills on time.
In fact, punctual remittance is only approximately one-third of the credit-rating equation, says Melody Thompson of financial-education nonprofit Financial Beginnings. "You would think, 'Hey, as long as I pay my bills on time, I should have perfect credit,'" she says. "It's really not the case."
Thompson explains that building good credit requires not just paying on time, but also paying off at least enough of your balance each month to keep it below 50 percent of your credit limit. "If you're showing that you owe, you know, $999 of $1,000, it's making it look like maybe you can't handle that,â she says.
Also factored into your credit rating are the number of credit lines you have—beware that department-store plastic—and your credit history's length.
"You don't want to encourage somebody to go out and get a credit card if they're not ready for it, but you do want them to start getting that history," Thompson says. "When you go out and want to buy a house, they're going to want to look and see how you've paid other debtors."
It's prudent to check your credit rating every six months or so. You are entitled by law to a free report from each of the three credit bureaus once a year, so you can check your rating up to three times a year without paying one of the many sleazy websites that exist to sell you your own financial information. Go to annualcreditreport.com—it looks like a phishing scam but is in fact the official, FTC-authorized site—to get your free reports.
Loan Stars: Four Nontraditional Lending Programs
Oregon Bond Loan Program
Who's lending: Oregon Housing and Community Services, oregonbond.us.
The deal: Home loans with a fixed, 3.5-percent interest rate and either a 15- or 30-year term.
The catch: You may not have owned a home in at least three years, must earn above a certain amount and can't have been discharged from a bankruptcy within two years or have had a real-estate foreclosure within five years. Some requirements are waived if the home is in one of the state's targeted areas.
Mortgage Assistance Program
Who's lending: Portland Housing Center, portlandhousingcenter.org
The deal: Home loans intended to supplement a primary loan and cover down-payment and closing costs. The loans are for up to $50,000. They have a fixed, 6.25 percent interest rate and a 30-year term.
The catch: Well, you need to have the primary loan. You also need to make 80 percent or less of the area median income and have a minimum of $500 for the down payment. Finally, the property must be in Multnomah or Washington County.
Tenant Improvements Loan
Who's lending: Portland Development Commission, pdc.us
The deal: Business loans for renovation of a commercial property's interior. These loans are for up to $2 million. They carry a fixed interest rate of between the prime rate (the standard rate at which financial institutions lend to favored borrowers) and the prime rate plus 3 percent. The term is five years.
The catch: The property has to be in one of PDC's Urban Renewal Areas and the borrower must meet certain financing requirements.
Small Business Microloan Program
Who's lending: Mercy Corps Northwest, mercycorpsnw.org
The deal: Business loans of $500 to $20,000 for start-ups (and up to $50,000 for existing businesses). The loans have a fixed interest rate of 8 percent to 12 percent and a term of two months to five years.
The catch: None, really, beyond the usual evidence of fiscal responsibility.