The last thing a new homeowner thinks about when making that first real estate transaction is foreclosure. Typically, they focus on those facts that “everybody knows”: real estate is a great investment, it makes more sense to own than rent, and the mortgage company approved the loan so it must be OK.
While the first two statements are true in many circumstances; real estate can be a great investment and it often makes more sense to own than rent- the last one about mortgage approval is a myth. In fact, the assumption that being approved for a mortgage loan means you can afford a home has landed so many homeowners in foreclosure, that the real estate industry and the United States Senate are tackling the subject.
US Senate Tackles Real Estate Lending
At the end of June, the president of the National Association of Realtors (NAR), Pat Combs, testified before the United States Senate on the subject of imposing more reasonable lending guidelines for both the real estate lenders and the borrowers. Here’s the tricky part. Countrywide Financial reported in April that foreclosures were double from last year. That rate of foreclosure increased from .44 to .83 percent. Recent attempts to more closely regulate lending standards have resulted in fewer low-income borrowers being able to qualify for real estate purchases. While this measure protects consumers to a certain degree, it also makes it much harder for low-income families to obtain loans at reasonable interest rates.
This has resulted in an increased number of real estate borrowers taking out non-traditional loans like ARMs and interest-only loans for the lower interest rates. The problem is that when the interest rates rise with inflation, or the loan amount comes due, these families are unable to refinance or handle the change in payment. That’s how they end up in foreclosure.
This is a concern for both individual families and the national economy. Real estate sales in March were reported down by 8.4%, and the new housing starts were reported down by 2.1% in May. What does this mean for the first-time real estate buyer?
Steps to Avoid Foreclosure
The good news is that the over saturated real estate market can be great for buyers. Sellers compete for your business, so you are likely to get great real estate investments.
But you need to pay close attention to your finances and your future commitments as you shop for a real estate mortgage. If your credit is in poor shape, take sometime to improve it before applying for any type of a real estate loan. A slightly higher FICO score can make a huge difference in the interest you will pay over the life of your loan.
Also, pay very close attention to the real estate loans available to you. An ARM (Adjustable Rate Mortgage) might be appealing for the lower interest rate and lower monthly payment, but will you be able to handle the payment if interest rates rise? An ARM can be a great tool in the right circumstances, but if you are unsure of your ability to handle the increase in monthly payment, you are better off to avoid it.
Many first-time real estate buyers obtained ARM loans assuming that they could refinance when the rate was raised. Stricter lending guidelines have prevented many from doing so- and these are some of the people who end up in foreclosure.
Finally, make sure you are aware of all the costs associated with owning real estate and a home. Upfront costs like taxes, PMI, and closing costs. Long term-costs like home and yard maintenance, and homeowner’s insurance. These will all impact your financial ability to afford your home and avoid foreclosure.