Avoid Foreclosure by Getting a Good Home Loan
Getting a home that you can JUST afford is a bad idea that can have consequences in the future. Unfortunately, no one is going to tell you this, because that is not their job. The people you hire when you purchase your home, the real estate agent, the mortgage banker or broker, the appraiser, the home inspector, the escrow officer, and the others, are there to facilitate the transaction. They are not there to act as your parent and tell you that you are pushing the limits of your budget on a mortgage payment.
People mistakenly think, and have thought, that a bank, or mortgage company, that determines the loan amount that they will offer you, have taken everything into consideration to minimize your likelihood of default. Unfortunately, they haven’t. The proof is seen in the current financial crises which resulted in millions of properties being foreclosed.
Tip #1: Never try to exceed the mortgage limit that you can afford.
When a bank, or a mortgage company, calculates how much you can afford, they take into consideration three basic things: The sum total of your incomes, all your installment expenses both fixed and revolving (like credit card debt and car loans), and the interest rate that you will be given (which is determined by many factors like your credit). Then they calculate a mortgage payment they feel you can afford which translates into the purchase price of the home. The key thing to remember is that the mortgage payment that is calculated is based on a payment that will remain fixed for the life of the loan and that the loan would be paid off at the end of the term.
These loans are called fixed rate loans. They are designed to be paid off at the end of the term. For example a 30 year loan takes 30 years at 360 equal payments to pay it off. These are great loans since you know month after month exactly what you are going to pay. The taxes and property insurance will go up over the years, but the underlying mortgage payment will remain the same.
What caused so many people to have problems with their loans was that consumers wanted to purchase properties that were more expensive then they could afford. Banks facilitated this by creating loan products that had initially low rates, called teaser rates, and then qualified the borrower on a lower rate or close to it. This resulted in an artificially low mortgage payment which resulted in a higher purchase price. These adjustable rate loans, as they are called, eventually increase their payments to offset the price reduction that was offered initially. The problem with these loans was the belief that as long as the values of properties increased the borrower could always sell in time of distress. Nice idea assuming property values go up and you build up equity and a bad idea if the reverse were to happen… which it did.
Tip #2: Never live paycheck to paycheck… leave some room.
The next problem is buying a home to the limit to which you can afford. People make the mistaken assumption that as time passes they will get pay raises, promotions, better jobs, and other proceeds from things yet to come. The problem with these projections is when they fail to come or they fall short of your expectations.
Struggling to make a mortgage payment month after month will eventually lead to stress, resentment and anger. People need to have fun money. If you spend every cent to pay on your living expenses, debts, and other obligations, you will soon reach a point that you will want to get out from under all this debt. That is why so many people have recently walked away from their homes. Stress eventually will get to you.
You need to leave some financial room to enjoy the little things in life.
Tip #3: Have a back-up plan for the unexpected.
Most people’s back-up plan, when properties were appreciating rapidly, was to sell their home if any problems arose. This is a great plan in an appreciating market and an awful plan when the market depreciates.
Today you need to consider other avenues of increasing income or reducing expenses. Some ideas are: The possibility of getting a second job. Another idea is having others living with you to contribute towards the household expenses. You can reduce expenses by selling things that have monthly payments (like additional cars that have loans). You may consider buying a home that eventually can have a portion rented out for additional income. Lastly, do you have sufficient savings put aside for times when your payments become difficult to make? The key is to consider the possibility that if things changed for the worse what could you do you to offset it.
Tip #4: The best idea is to buy conservatively with plenty of comfortable room in your payment.
The old adage of hoping for the best and preparing for the worst is truly a good saying. While buying a more expensive home that you want may not always be the best choice. Finding something that meets your basic needs and allows for financial flexibility is generally the best way to go.
Today millions of people have lost their properties or are struggling to make their payments. Don’t become one of them. To error on the conservative side is not too bad of an error to make.