Getty Images
This dream, however, can suddenly become a nightmare for those who enter the process without proper knowledge, wisdom and the right kind of preparation. The current crisis in the housing and credit sector and the fallout that is causing millions of families to lose their homes to foreclosure demonstrates this harsh reality. The risk of foreclosure does not however have to be a realistic possibility for those who choose to become homeowners. You can make yourself foreclosure-proof before you even go about purchasing your own home.
The foreclosure-proof process requires an understanding of the basics of home purchasing, home ownership, credit and mortgage financing. It requires that a prospective homeowner not only considers the explicit costs but also the hidden costs involved in the process.The following considerations are vital to a foreclosure-proof homeownership:
1. Do not purchase a home you can not afford or feel pressured that you should be living up to the Joneses. You should be able to comfortably afford your home. Your housing costs should not exceed 28% of your current income nor should your total debt servicing costs exceed 36%. It is an ideal to base this ratio on the income of just one partner in a two-income household.
2. Do not enter the process alone unless you are well experienced in every facet of the transaction. You may need to hire the services of a knowledgeable real estate buyer's agent to represent your interests. Other professionals you may need to interact with in the process include mortgage broker or your banker, home inspector, real estate attorney and financial adviser.
3. Learn how to negotiate for the best deal on purchasing a home. With the help of your buyer's agent, check various sources including bank and other institutionally owned properties (REOs), for sale by owner, etc. Avoid purchasing at retail (appraised market value), if possible. If you purchase a home, for instance, at 10% below retail and contribute 20% of your resources toward the purchase price, you are in effect starting off your homeownership with a 30% equity.
4. Avoid a 100% mortgage deal if at all possible. The more you contribute from your own resources toward the purchasing of your home, the lower will be your interest rate and monthly payments. Having equity in your home from the very start will provide you with leverage when necessary. You will also be less likely to walk away from your home when facing a temporary financial setback.
5. Establish a savings reserve that is easily convertible to cash to cover at least 6 to 12 months of debt servicing obligations. In the event of an emergency such as an unexpected job loss or sudden illness that affects your ability to continue earning your regular income, you will be able to continue making your payments and preserving your credit rating until your circumstances change.
6. Avoid credit card debts. Pay off your balances each month or keep your balances below 35% of your allowable credit limits. The less debt you carry is the more resources you'll have available to keep your mortgage foreclosure-proof.
7. Understand the basics of mortgage financing. Negotiate for the most appropriate mortgage product to meet your specific needs and the best available interest rate and terms. Know when an adjustable rate mortgage might be to your advantage and when a fixed rate program is more appropriate.
8. Keep your credit files squeaky clean and monitor activities to ensure accuracy. This means paying all bills on time. With an excellent credit rating, you are better able to take advantage of opportunities as they arise.
9. Do not use your home as an ATM machine. Avoid home equity lines of credit, unsecured debt consolidation programs and other financing schemes that place your home at risk. When you consolidate unsecured debts by creating a lien on your property, you are actually swapping unsecured debts for a secured debt and placing your home at risk.
10. Set up a family budget and plan to be debt-free in the shortest possible time.
By taking the above tips into consideration and making provisions for them in advance of purchasing your home, you will be preventing foreclosure on your home before you buy and becoming foreclosure-proof.
-Lester Rennard, http://consumerfinancialeducationforum.com
