Protect Yourself from Foreclosure BEFORE You Buy a Home
First, people that had less than perfect credit jumped into buying a home with subprime mortgages during the housing boom. Everyone wanted to get the rates while they were low. Many people that signed onto subprime mortgages did not understand that their rates would increase in a few years. They heard that their rate was "fixed", as in not fluctuating from month to month with the market rate, and they signed on quickly. Most subprime mortgages increase in the interest rate after the first few years. When this began to happen, people could not afford the increased payment and the foreclosure process began.
The second reason for increased foreclosures, people are getting much more home than they can afford. Mortgage companies are known to preapprove you for a higher loan than may be comfortable for you to pay on a monthly basis. This is because mortgage companies know that you will pay your mortgage first, and other bills that are not as essential later. People assume that if they are preapproved for the higher loan they will be able to make it work. However, it leaves no room for any emergencies or problems that life always brings, and foreclosure for some is inevitable.
The last reason for the increased foreclosure rate is that people are putting no money down on homes, sometimes even increasing their mortgage rate to 110% to include the closing costs. Often, by doing this, people overextend the payments that they can make on a home.
In order to avoid foreclosure on a home, there are several things that you should consider BEFORE that you sign a contract on a home. Here are those things that should be taken into consideration.
1.) Do you have an emergency fund? Owning a home can be unpredictable at times. Hot water heaters break, furnaces need parts replaced, a pipe breaks, a major appliance breaks down. Do you have at least 3-6 months salary in an emergency fund to deal with these problems? If not, you should reconsider purchasing a new home until you do. You will be able to cover unexpected household costs or be able to deal with an illness or job loss easier if you have this emergency fund.
2.) Make a realistic budget. Track your expenses over the past few months and know exactly how much you typically spend on food, gas, electricity, entertainment, etc. Then leave some money aside for unexpected expenses. Base your monthly payment on that very informed budget.
3.) Experts state that you should not buy a home more than 3 to 5 times your annual income. Keep this in mind when looking to buy a home. Be realistic in what you can afford. Realize the process for foreclosure starts after 90 days. Keep in mind any issues that may come up that could put you in that 90 day foreclosure window.
4.) Have a down payment for a home. Do not take out a 100% mortgage. Even worse, do not take out a mortgage for over 100% the price of the home. You should have at least 10% to put down above and beyond your closing costs. A better down payment would be 20 to 30% of the home price. This helps lower your payments so that you can avoid foreclosure.
5.) Stay away from subprime mortgages or predatory lending. If you have bad credit, work on your credit before you consider buying a home. Do not settle for a loan that will most likely get you into trouble later.
6.) Realize that you will be preapproved for a loan higher than you may be comfortable paying on a monthly basis. Do not let the realtor show you homes in a price range that you are uncomfortable with purchasing. Remember, they work on commission; therefore they do not have only your interests at heart.
7.) Look into moderate income housing programs. Some counties are starting to add these programs so that people that make the average income in an area can afford to get into their first homes. These homes are similar to much pricier homes in the area, but they are sold typically at a 30% lower cost as part of a government program. See if there is a program in your area.
If you follow these steps, you will likely be able to protect yourself from foreclosure in the future.
Published by C.Fiore
Educator. Writer. Parent. View profile
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- 10 Ways to Avoid Foreclosure...Don't Lose Your Home
- Tips to Avoid Foreclosure
- Secure a Mortgage Without a Big Down Payment
- Guide to Closing Costs for Home Buyers and Sellers in New York State
- Why Do You Need an Emergency Fund
- Refinancing Closing Costs
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- Avoid subprime loans.
- Have at least 3-6 months salary in an emergency fund.
- Look into moderate income housing programs in your area.
4 Comments
Post a CommentVery good information!
Foreclosures are on a rise here where I live. One main reason is many factories are laying off, it is sad.
These are excellent tips. When we heard our pre-approval amount my husband and I almost fell out of our chairs. Apparently banks do not expect that you will eat or that your children will need new clothes! My only addition would be to remember that insurance and taxes will make your escrow payment much higher than what the bank needs. You have to budget for that, too.
Very sound advice!