After what has gone on over the last 3 years with no money down loans and “stated income” loans the foreclosure rate has jumped a long way. House prices have come down in excess of 35% in some locations. If you are one of the few Americans who didn’t buy a home in the last two years you can get some really good deals now.
If you are in the market to buy a house how can you make sure that you don’t make a poor decision and find yourself in the same boat as most homeowners now. Here are some rules of thumb that the potential homeowners and the banking industry should have been following.
Make a down payment – Everyone should make a down payment when buying a home. No I do not think it has to be 20%, but it should be at least 5%. Once upon a time the only way you could get a mortgage with this little down was if you got an FHA or VA loan which required Private Mortgage insurance that increased your monthly payment until you had 20% equity.
Get a fixed rate loan – The best way to make sure that your payment stays close to the same is remove as many variable parts as you can. With a fixed rate loan the only portion of your monthly payment that can change is your taxes and insurance.
Payment should not exceed 25% of monthly income – There has been a lot of arguments about who was at fault in the foreclosures of the last two years the lender or the borrower. If this rule had been followed by most borrowers, they would have been able to make their payment, and save more which would have helped them if they have lost a job.
Get a 15 year mortgage – There have been many things written about the 15 year versus 30 year mortgage. I understand that it is tempting to get the 30 year and pay extra per month to pay it down, but a 15 year builds equity automatically faster and would help keep borrowers from being as upside down on their home as they are now with the recent drop in prices.
These tips do not indicate that you won’t end up in foreclosure, but each of these items will reduce the likelihood of you being unable to manage and work out any problems that arise. Remember as an individual you can make decisions to manage the risk you undertake in your finances better than lenders can. Owning a home is a privilege not a right.
