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Cathy is a young, intelligent, single woman who can’t quite believe what happened to her, and all of it so quickly. It was only two years ago that Cathy had qualified for a mortgage and paid the down payment on her dream home. A tiny but perfect little house not too far from where she worked. She had been hearing about foreclosures and mortgage issues for a while but never believed that the warnings applied to her. All that changed when Cathy got laid off. Losing her job left her floundering. Her unemployment check was hardly enough to cover her mortgage and she still had bills to pay and a household to run. She began to struggle to make ends meet and her monthly mortgage payments were made late. As a result, late fees were promptly applied and the balance due began to rise. After three months of missing her payments, the bank sent her a notice that it would begin foreclosure proceedings. Left with no alternatives and little money in her account, Cathy’s precious home was taken away from her and she is now left with nothing.
This is just one of the many personal stories of lives affected by foreclosure. When you buy a home, the last thing you think about is having it taken away from you in such a cold, impersonal manner. But, as delinquent mortgage payments increase, foreclosures on these properties increase as well. There are many ways to prevent this from happening, but to do so we must start from the beginning: from deciding to buy a house, to managing finances and handling the purchase, and to the legalities involved in the buying process.
You have finally decided what type of housing fits your needs. The next big question you have to ask yourself is: do you rent or buy? As expected, there are a numbers of reasons both for and against each option. Let’s take a look at them.
When starting out on your own, renting seems to make the most sense. When you are young, or have no immediate plans to start a family, renting might be your best option. There are rental complexes that offer amenities such as swimming pools, tennis courts, maintenance staff and even laundry units that can save you time and money. Renting also offers more flexibility like the ability to relocate more easily. Leases for renting (between the landlord and yourself) give the renter more mobility and are easier to get out of. With most leases, you can pay a penalty and “buy out” of the contract in case you need to move before the end of the lease period.
But the biggest advantage to renting is that it rarely requires a large down payment of cash. Most landlords will require a security deposit (of about 2 months’ rent) but this is still less than the down payment required when purchasing a house. Utilities might also be included in your rent, further lowering your outgoing monthly payments.
On the other hand, renting offers no control over the property. With regard to repairs, redecorating and upkeep, you are in the hands of the owners or landlords. The owner might not be prompt in dealing with any repairs (from plumbing to broken windows) or you might be forced to stay in unpleasant or unsafe conditions that are beyond your control. There may also be restrictions on pets or visitors, for example, which could be a problem. Finally, as a renter you do not build any equity. At the end of the day, the property is not owned by you and you receive none of the tax benefits of owning a home.
Buying a home gives a sense of freedom for many. There is the freedom to decorate, the security and independence associated with owning your own home, and the pride that comes along with it. There are also several financial benefits related to home ownership. You can build equity and take advantage of tax benefits like interest and property tax deductions. As you pay off your mortgage through regular monthly payments, you are slowly gaining more and more equity or cash value in your own home.
On the downside, selling a house is often complicated and you can rarely just pack your bags and leave as you might have done while renting. Finalizing a sale depends upon factors such as what type of house you own, property values and upkeep in your neighborhood, and what the market conditions are at the time. In all, selling a home can be a time-consuming and frustrating process.
Owning your own home also brings with it responsibilities like maintenance and upkeep that require both your time and money. Even redecorating can add significantly to your expenses.
Armed with these pros and cons, you can now sit down and organize your thoughts on paper:
This should give you a good idea of whether you should buy or rent, and what you can realistically afford, before taking the next step. There is no perfect choice, just one best suited for you at the time. Keep in mind your career, your income, how often you travel (or relocate), and your personal relationships before you reach any conclusion.
Buying your own home is a dream for many people, but how can you tell when you are ready to buy? If you visit a real estate agent or mortgage lender, the odds are that they will convince you that the payments are within your reach and encourage you to go ahead and buy.
But often what seems manageable on paper becomes more difficult in real life. Only you know your financial status and your real spending habits. Before you begin looking for a home, or even approach an agent, read on to see if you are ready to buy.
You will first need to review your financial situation. Calculate your income, all of your debt and your Debt-to-Income ratio. Most lenders will require this information. This is the time to approach the three credit bureaus for your recent credit reports and review your latest credit scores. If you find anything unfavorable in these reports that can be fixed, try to resolve these issues promptly. If, however, you have a history of late or missed payments, now may not be the best time to apply for a mortgage loan. If you have a below average credit score, you may not be approved, or you may pay a higher interest rate on the loan that will make a huge difference on the total amount you pay for your home overall.
You may be ready to buy when:
If these items describe you, now might be a good time to explore buying a home.
Now that you know you are ready, the next steps involve consolidating your financial position in order to avoid any problems later on. These include:
While owning your own home means no longer having to pay rent, it also comes with a host of responsibilities and financial decisions. Before taking the next step, think carefully once again and make an informed choice.
You have looked high and low and finally found the house of your dreams. It’s the right size, in the right location and you hope, available for the right price. But the real question is whether you can actually afford it. There are a number of factors that go into answering this question. And, just because your agent says you can, it doesn’t necessarily mean you should. After all, buying a house is only one part of your entire financial picture. You have other expenses as well, including day-to-day spending, education loans, car loans, retirement funds, and insurance costs among others. Spending all your income on a house, no matter how perfect it seems, is not the wisest thing to do and is often a recipe for disaster.
The following are some easy guidelines to determine how much you can afford and what you should be spending on your dream home.
Most lenders will take two ratios to assess your qualification for a loan. The first is your Debt-to-Income ratio. Here, the sum total of all your debts should not exceed 38% of your gross income. Secondly, lenders calculate the ratio of your total monthly housing costs with your monthly gross income. These housing costs include your mortgage Principal, Interest, Taxes, and Insurance (PITI). The ratio should ideally not exceed 28% of your income.
However, if these ratios do not match your financial profile, don’t lose hope. There may be programs specially designed for consumers with poorer credit or who fall within a low income bracket that can help you obtain an affordable mortgage. Knowing which loans you can qualify for will help you further narrow your search for the most affordable house for you.
These general rules and guidelines will give you an estimate of how much you can truly afford when buying a home. There are a number of online calculators that can help you reach this information as well. A financial planner or a housing counseling agency is also an effective option when looking for unbiased, well-informed advice.
For many, buying a home is a nerve-racking process. Full of legalities and paper work, it’s a daunting prospect that can put you on an emotional roller coaster. This is a normal reaction, so do not worry. Take things step-by-step and you will be even closer to becoming a home-owner.
Learn all you can about the home-buying process. Research the Internet and look through the classifieds to check out what houses are on sale in the area of your choice. Drive around and narrow down the localities you are interested in. Register with a housing counseling agency for more information on the process and to get professional help to guide you through. Get your finances in order. Apply for your credit reports and get pre-approved for a loan. This is also not the time to make any big ticket purchases on your credit card or to change jobs. A steady income and a good credit history is what will get you the best interest rates on your home loan.
Go ahead and begin your hunt for your perfect house. Drive around different neighborhoods, get a feel for the location, speak to people, attend open houses, take photos and organize your comments and questions about each of your potential choices. Make a checklist of what you are looking for in your new home (see box below). You could also enlist the help of a real estate agent to make your choice more informed and less stressful.
Questions to Ask Yourself:
You can start searching by looking for yard signs as you drive around, through the classifieds of the newspapers or home magazines, on the Internet, or by attending open houses that are regularly advertised.
This is it. You have narrowed down your search and you are willing to make a formal offer. But before you do so, first ensure that the house is being priced correctly. To make sure that you are not overpaying, check out the Comparable Market Analysis (CMA) lists of recent sales in the neighborhood. If you have an agent, they will do this for you. There are also online appraisal services that can help you with similar information. Things to keep in mind while making an offer include:
The next step after making your offer is to have the home inspected formally by a licensed inspector. This will determine what repairs have to be made and what needs to be replaced. A real estate agent will organize this inspection for you. If you are handling the purchase on your own, make it clear in the contract who is paying for the inspection and who is responsible for the repairs that are recommended. As mentioned earlier, there should be a contingency clause to void the contract in case the inspection reveals problems that cannot be resolved between the seller and yourself. Home inspection should include:
There are four basic transactions involved in the home buying process. They might seem confusing at first, but with some guidance and information, it’s not so difficult to comprehend.
In terms of housing, the loan that the bank or lender grants you is your mortgage (or note). The monthly amount you pay the bank/lender is your mortgage payment and the rate of interest is your interest rate or mortgage rate. If you don’t make regular payments or default on payments to the bank, the lender is fully within its rights to repossess your home. The term of your loan indicates the number of years you will take to pay back the entire amount (with interest). It is normally either 15 or 30 years in the US. A 30-year term is easier to qualify for, with lower monthly payments, allowing you to have more liquid cash and possibly purchase a more expensive house. But it obviously takes much longer to pay off this loan. A 15-year loan, on the other hand, saves you a lot on the interest and can help you pay off your loan in a shorter time. You have to choose between the flexibility of the 30-year loan versus the short duration of a 15-year loan. This will obviously depend upon your financial status and future commitments.
It is ultimately your lender’s job to find the most affordable loan for you depending on your requirements and qualifications. But, it is always wiser to be informed about the terminology and “legalese” associated with the different types of loans available. Following are the different types of loans and assistance available.
There are times in one’s life when unforeseen circumstances arise. Even if you work hard and make all your payments on time, situations such as illness, being laid off, marital problems, an increase in your household expenses, or emergency repairs can affect your ability to pay your debts. Even one of these situations can affect you making your home loan payments and if these missed payments continue for a while (generally longer than three months), you could be facing the prospect of losing your home. This is where loss mitigation comes in. It is a process where a representative of the holder of the loan or a third party agency tries to stop the foreclosure before it takes place. A third party agent is often best suited for this job because of the unbiased professional experience they offer.
It is through the joint efforts of the federal government and the mortgage industry that the process of loss mitigation evolved. When too many homeowners found themselves losing their properties due to default and delinquent payments, this program was created to work with both parties concerned (the homeowner and the lender) in order to reach an alternative solution.
The main goal of loss mitigation is to help the owner keep his or her home. Options such as loan modification plans, renewed repayment plans, partial payments, and an extension of the loan could be employed. If all this fails, then every attempt to get the best price possible for the house is made, before the loan foreclosure begins.
Here are some of the different types of loss mitigation options available:
Knowing your rights in matters of default payments and foreclosure is of extreme importance. At the end of the day, lenders want to keep you in your home and it is your responsibility to prove to them that you will live up to your part of the bargain. Loss mitigation helps to work out a mutually sustainable solution and prevent further losses and financial burden in case of foreclosure.
When you signed the agreement with the lender who loaned you the money to buy your home, you agreed to pay back the loan in a series of pre-determined monthly payments over a fixed period of time. If you miss these monthly payments (often for even as little as three months), this will be considered a delinquency. The bank or lender is fully within its legal rights to start the process of foreclosure on your home and take ownership of it. Your lender will start the proceedings by sending you a notice but there is no need to wait until that happens to start being pro-active and preventing the foreclosure. If you find yourself having trouble meeting your monthly mortgage payments, it’s time to take stock of the situation and avoid a financial crisis.
There could be a number of reasons that cause you to default on your payments. These could include losing your job, ill health or an injury, a divorce, the death of a spouse or even a change in your financial picture. What often happens is that you are so involved in dealing with this crisis in your life, the last thing you pay attention to is other responsibilities such as paying off your debts. That is why it pays to plan in advance. You could speak to a housing counseling agency or look for professional advice to help get your finances back on track before it’s too late.
The most important thing when facing foreclosure is to never lose hope. There are a number of alternatives and solutions out there that can help you as long as you are willing to make the necessary changes to improve your life. Keep in mind that your lender only wants its money back and they would rather avoid going through the complicated foreclosure process.
If you continue to be positive and look for ways to deal with the crisis, there is a chance that you might be given another opportunity to deliver on your promises and save your home as well. Be informed, understand the situation, take professional advice, stay honest, and think positively. It can be done!
We believe that education is the key to a better financial future
Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
CESI is NOT A LOAN COMPANY