Purchasing a Home Without Doing Your “Homework”

When housing prices were sky-rocketing in the past couple of years, many renters thought they needed to buy a home as quick as possible before they were priced out of the market. In a lot of cases people didn’t do their “homework” in their rush to buy ending up buying houses they really couldn’t afford.

Because they weren’t ready or just were in a hurry many used unusual mortgage products like adjustable-rate-mortgages that start low and increase after a few years, and interest only mortgages. When the market cools, as being predicted, people who made no down payment or a very small one, may end up having to sell their houses for thousands less than what they owe on it.

Previously mortgage lenders insisted that borrowers not commit to more than 28 percent of their gross income to house payments - and that being on standard fixed rate mortgages. Now lenders do not enforce that cap so it is up to the borrowers to determine how much they can afford but many seem to think if the mortgage company loans it to them they must be able to afford it. Unfortunately there is a lot of pressure right now on mortgage brokers to close the deal on the fastest financing deal the customer will qualify for.

If a homeowner decides on an adjustable-rate mortgage they should play out every future scenario possible so there are no surprises down the road. Maybe they bought before selling their previous home sold thinking that when it did, they would use the equity on a down payment for a fixed rate mortgage. Or, their plan might be to sell and move on before the payments make a big jump.

But what happens if their previous house doesn’t sell in time or they can’t sell the new house? What if houses have become so expensive they can’t afford to move, or they lose their job? Then they could get sucked into a very dangerous option ARM or negative amortization loan.

Best advice, save up for a down payment and buy what is affordable to you.

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