Buying A Home and the Mortgage Crisis
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.
Thankfully, people who are buying a home now have the opportunity to strengthen our long-term economy and protect themselves by considering and acting on good financial advice. One of these key pieces of advice is to live within one’s means. This is true whether buying a home or choosing what to eat for dinner.
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. Save for a large down payment. It’s still smart to follow the traditional guideline of a 20% down payment even though loans are available with down payments as low as 3%. Paying more for your home upfront lowers the amount of debt you’ll carry. It can also mean a smaller monthly payment, and correspondingly, less financial strain and stress. While saving for a down payment to buy a home means you may have to wait a year or two, it can bring great rewards.
2. Retain sufficient savings. It’s also important have the equivalent of a few months of mortgage payments readily available in a savings account in case of job loss or other emergency. In fact, most loans have a reserves requirement. Having three to six months worth of payments in a bank account can bring peace of mind and help you avoid foreclosure or dings on your credit should something happen to your source of income or if unexpected expenses arise.
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.