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Preventing a Mortgage Crisis When You Buy a Home

May 21, 2008
Among the culprits of the current mortgage crisis are the home buyers who purchased homes and obtained mortgages that were too expensive for them. These people, perhaps even innocently, have ended up hurting both themselves and the worldwide economy.

The good news is that current homebuyers have the ability to strengthen our long-term economy and protect themselves by following sound financial principles. Foremost among these is living within one's means. This pertains to items small and big, from the food a person purchases to the home a couple buys.

Heeding the advice listed below can assist you in living withing your means, having greater peace of mind, avoiding foreclosure, and creating greater stability in the economy.

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. A higher down payment lowers the amount of debt you'll carry. It can also mean a lower monthly payment, and correspondingly, less financial strain and stress. It's true that saving for a down payment to buy a home takes time, but 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. Look at all the costs. In contemplating how much you can afford as a homebuyer, you need to consider the expense of furnishing, improving, and maintaining your home. How much will the couch, table, chairs, beds, etc. cost? Can you afford both the house you're looking at and everything that will go into the home?

4. Be aware of your total debt load. You also want to look at the amount of debt you already have and how much total debt you'll have once you take out a new loan. Will more than half your income go to paying off debt? How much will be left for living and saving toward the future?

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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