According to RealtyTrac, an estimated 4.5 million homeowners will face foreclosure this year; a clearly alarming statistic. It makes you wonder where these homeowners went wrong and if it can happen to you. The majority of these homeowners made one or more of the following five financial mistakes at some point in the process of purchasing their home. If you are aware of these mistakes and can avoid them, the chances are good you will not be facing the foreclosure issues that are plaguing many of today's homeowners.
Mistake #1: Shopping for the home before shopping for the loan
It is fun shopping for a home, no doubt; especially in today's cyber-marketplace with such a variety of innovative real estate websites available to buyers. It's all too easy to look at a virtual listing and pick up the phone to set up a showing with a real estate agent for a "real life" tour. This is not the right way to shop for a home, however. Before you begin looking at homes, you must shop for your mortgage first, while gaining an understanding of the borrower qualification factors that current mortgage providers require. What good is shopping for a home if you don't have the credit, income, down payment, job history or rental payment history to obtain a home loan? These are the factors that lenders will look at before pre-approving you for a mortgage. Also note that real estate agents are not salaried salespeople; they get paid solely by commission for selling homes. It is a faux pas to have an agent show you homes before you are pre-qualified by a bank or mortgage broker for home financing in a price range that suits your budget. Go to various banks and mortgage companies and interview the loan officers, eventually settling on one you like who can guide you into "pre-qualified" status before you set out to shop for the home.
Mistake #2: Spending too much
We are in a global economic depression, mainly because people overspent on their homes with the encouragement of banks and mortgage lenders. Most individuals prescribe to the mentality of purchasing the largest or most expensive home within their budget. Then, when an inevitable financial issue arises, they miss one or more mortgage payments, or worse yet, lose their home to foreclosure. First time home buyers need to understand that a home is a liability until it is paid off, so why overspend? It is very important to note that banks will not work with you if you are late making your monthly mortgage payment once you own a house; a mortgage lender's job is not to care about your financial woes or help you make your mortgage payment. They only care about collecting your on time monthly payment. With this being acknowledged, buy a home in a comfortable price range with a mortgage payment less than 40% of your gross monthly income. It's also a wise idea not to put every penny you've ever saved into the down payment of your house. When financial problems arise, you'll have money saved up to solve them as a result of putting down a more modest down payment. Homeowners who have bought smart can always sell and upgrade to a nicer home later; yet another reason not to spend too much on a house.
Do you know what a home "loan" really is?
If prospective homeowners knew how their soon-to-be mortgage came into existence, they would be much more careful before signing on the dotted line at the closing table for their home purchase. The money for a home loan comes from the Federal Reserve Bank and is printed out of thin air and wired to the web of commercial mainstream banks it sponsors. For every dollar a commercial bank holds in its reserves from depositors, roughly nine times that amount can be printed up for consumer loans, including mortgages. This is called fractional reserve lending; though it should be called fractional reserve "printing". Commercial banks like Chase, Wells Fargo, Bank of America, etc. are simply marketing arms for the Federal Reserve itself. These banks get to create mortgages with this no cost "funny money" and collect interest on it. That's a pretty good position to be in, wouldn't you say? The bank puts up absolutely nothing of value and only facilitates the transaction. The homeowner then pays their mortgage servicer every month, with interest, until the home is hopefully paid off. A homeowner bears all of the financial exposure in this scenario and can lose their house to foreclosure with just a few missed payments.
A mortgage is designed to be most profitable for banks in the beginning years, with very little of the homeowner's money going towards principal reduction (the loan's pay down). On a $200,000 home loan at 6.5% interest, the monthly payment is $1,264.14. In the first year of this mortgage, $12,934.18 will go towards interest and just $2,235.45 will go towards paying off the home. Each year, the amount of interest the homeowner pays will be reduced while more money will be going towards the principal pay off. Over the life of the loan in this example, $255,088.98 will be spent in the form of interest. That's a lot of money wasted on interest and a lot of financial exposure for the homeowner.
Mistake #3: Choosing the wrong loan
Besides spending too much on a home, homeowners often select an adjustable rate mortgage (ARM) as their mortgage product. ARM's are very attractive to consumers because they offer a lower interest rate for a fixed period of usually 1-7 years before the interest rate adjusts upwards. This lower rate is called a "teaser" rate, and can save homeowners money during the early years of a loan, the years in which nearly all of a homeowner's mortgage payment is made up of interest. ARM's have been thought of to be a good choice for consumers; the mentality being that the homeowner will sell or refinance before the ARM's interest rate adjusts upwards. However, with the unthinkable depreciation of home values in our modern time, many consumers cannot refinance out of ARM's they selected several years ago because they owe more on their loan than their home is worth. They are locked into mortgage rates they cannot afford and have to spend every available penny on skyrocketing mortgage interest every month. Many are just walking away from their homes as their mortgage servicers will not help them. What good is saving a few hundred bucks a month by selecting an ARM if your home cannot be sold for at least what you owe on it or you cannot refinance out of it later? Those that select ARM's also must deal with the fact that their loan resets every time it is refinanced; paying off the home becomes much more difficult. Homeowners who lock in a 30 year fixed rate mortgage do not have to face these problems.
Mistake #4: Buying a perfect product
Nearly 50% of current home sales are going to first time home buyers, the majority of which are under the age of 30. New homebuyers, especially young ones, tend to shop for homes that are in perfect or near-perfect condition because they don't have experience with home maintenance and minor repairs. Simply put, homes that need various repairs often scare new homebuyers. However, homes with various imperfections should encourage potential owners because they provide unparalleled financial opportunity.
The term sweat equity is used to describe the value increase of a home when an owner makes improvements to it. Creating sweat equity is a cheaper and faster process than creating long term equity by paying a home's mortgage down over many years. This catapults a "sweat equity homeowner" into a higher net worth years before an individual who pays down their mortgage diligently every month. First time homebuyers who opt to shy away from a home that needs some work are losing out on a great opportunity to create instant sweat equity by doing repair work themselves. Most first time homebuyers want to move right in to a clean, updated home that needs no work at all. This is a convenient choice; but homes that are in move-in condition often come with a higher price tag as compared to a foreclosed home that needs paint, flooring and landscape.
Someone who pays full price for a pristine house is accepting the fact that their paycheck will be going into paying the mortgage down over time, creating equity in the long run. In the case of a homebuyer that buys a home needing some refurbishing, their paycheck will be going into a much smaller mortgage payment because their house is initially worth much less. This genre of homebuyer will have to spend time and money renovating the house to their liking, but they will have a house that has decades of equity built into it in a matter of months, versus the retail priced buyer who is burning their money on mortgage interest.
Mistake #5: Not understanding what may happen if the home becomes unaffordable
If prospective homeowners knew how reluctant banks and mortgage servicers were to help financially distressed homeowners, they would be very strict about choosing a home they can truly afford and locking in a 30 year fixed rate loan. Banks are not staffed up for customer service, delinquent payment or loan modification issues. The minute a homeowner misses a payment, the legal wheels start churning towards a foreclosure which is a financial breakthrough for a mortgage servicer; they usually sell the home for a profit after foreclosing on it. Here are some alarming statistics pertaining to the future of a homeowner who loses his or her job, has a medical issue, or cannot refinance out of an ARM which has adjusted to a higher interest rate:
As of March 2010, Bank of America, our nation's largest mortgage provider, was facing 1,020,000 delinquent home mortgages they service. They have modified just 22,303 of their customers' delinquent mortgages. This is only 2.1% of their distressed homeowners' mortgages they service.
JP Morgan Chase has modified 20,450 delinquent mortgages of the 437,323 distressed homeowners they face; which is just 4.6%.
Before you apply for a home loan, think about the billions of dollars in interest these banks collected from each homeowner; and yet over 96% of these homeowners who once had a perfect pay history will be foreclosed on.
Looking After Your Real Estate Needs
Jeremy E Moore
Century 21 United Realty
Tel (705) 743-4444
Cell (705) 931-0893
Fax (705) 743-9606
Toll Free 1-877-272-4040
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