Preventing a Mortgage Crisis When You Buy a Home

Posted by Brandan Hadlock, with Direct Mortgage Home Loans on May 21st, 2008 filed in Investment Mortgage Tips

While there are multiple reasons for the current mortgage crisis, part of the responsibility lies with borrowers who bought homes and acquired mortgage financing they couldn’t really afford. The result has been many people hurting themselves, and in a classic ripple effect, harming the entire global economy.

The good news is that current homebuyers have the ability to strengthen our future economy and protect themselves by making smart financial decisions. Chief among these is living within one’s means. This pertains to items small and big, from deciding whether to go to the movies to choosing between which home to buy.

Paying attention to the points listed below can help you live within your means, avoid foreclosure, have more peace of mind, and create greater stability in our national economy.

1.Don’t buy until you have a large enough down payment. It is still possible to obtain financing with small down payments, but it is wise to follow the traditional guideline of a 20% down payment. Doing so will decrease your debt and give you a smaller mortgage payment which translates into less financial strain and stress. You may have to wait to in order to pay a high down payment on your dream home but doing so can bring great rewards.

3. Save enough reserves. Mortgage payments are major expenses and it is important to have enough in savings to cover your payments should you become unemployed or have unexpected emergencies. As a matter of fact, most loans require you to have a certain amount of savings for this very purpose. By keeping at least three to six months of mortgage payments in a savings account you can keep your credit good and avoid foreclosure if a significant financial challenge arises.

3. Consider all the costs of owning a home. When determining how much you can afford as a homebuyer, you should consider the expense of furnishing, improving, and maintaining your home. How much will the bed, couch, table, chairs, and lawn mower, etc. cost? You’ll have to pay for your own plumber now. Can you afford both the house you want and all the additional expenses that go with owning a home?

4. Take into account your total debt load. You’ll want to look at your current liabilities (car loan, credit card debt, etc) and how much total debt you’ll have once you take out a new loan. Will more than half your income be used to pay off debt? How much will remain for living and saving toward the future?

Acting on the points above means you may have to exercise some delayed gratification and discipline, but doing so will help you enjoy the house you buy and play a role in preventing a future mortgage crisis.