While there are multiple causes for the current mortgage crisis, part of the responsibility lies with borrowers who purchased homes and took out mortgages they couldn't really afford. Many of these people have ended up hurting themselves, and in a classic ripple effect, have negatively impacted the entire global economy.
The good news is that current homebuyers have the ability to strengthen our long-term economy and protect themselves by making smart financial decisions. Chief among these is living within one's means. This is true whether buying a home or choosing what to eat for dinner.
Heeding the advice listed below can help you live within your means, avoid foreclosure, have more peace of mind, and create greater stability in our economy as a whole.
1. Wait until you have a larger down payment.
Although loans are available with down payments as low as 3%, the traditional guideline of a 20% down payment is still smart. 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. 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.
2. Have sufficient savings.
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. In fact, most loans require at least a couple months of reserves. Having three to six months worth of payments in savings can bring peace of mind and allow you to avoid foreclosure or dings on your credit should something happen to your source of income or unexpected expenses arise.
3. Look at all the costs of buying a home.
In contemplating how much you can afford as a homebuyer, remember that a mortgage isn't the only cost when you buy a house. Besides possible HOA fees, property tax, property insurance and possibly flood insurance, you'll also have the costs of maintaining, improving, and furnishing your home. How much will the new bedroom and kitchen sets costs? How about the lawn mower for your new yard? Can you afford the additional costs of home ownership along with your mortgage?
4. Consider all your debts.
It's important to add all your current debts (credit card debt, auto loans, payment plans) to the amount of your proposed mortgage loan. Will paying off debt take up more than half your income? After you buy your home, home much money will be availabe for savings, investments and just everyday living?
Following the above advice may require discipline and delayed gratification, but the greater safety and peace is well worth it. Additionally, you'll be doing your part to prevent a future mortgage crisis.
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