You’re Qualified—but Can You Pay for It?

The rate of foreclosures in the United States is rapidly increasing, recently hitting a 37-year high. One analyst, Michael Calhoun of the Center for Responsible Lending informed the U.S. Congress that the situation is “the worst disaster in the mortgage market since the Great Depression.” What has led to this situation and how can you avoid becoming a foreclosure statistic?

The first thing to do is note that your mortgage payment will not be the only new bill coming your way when you buy a home. Second, make certain that you are realistic about the kind of house payment that you can actually afford when you sign on the dotted line. These two keys will help you insure that your lender doesn’t take away your keys.

Let’s talk about some of those other bills to expect in addition to the mortgage. If you do not have a significant down payment—up to twenty percent of the purchase price—it is likely that you will have to buy mortgage insurance for the amount of the loan above 80%. You will be paying property tax, which is different across the country and in many locales increases over time. You will need to have homeowners insurance. Finally, if you don’t buy a new home, the repairs are all up to you.

This all adds up quickly. For a $250,000 loan, the loan may be $1200 to $1300 a month. Your additional costs, however, will bring your total due for your new home up to somewhere in the $1800 range. So while you may qualify for the loan, can you pay for all the other bills that go along with your purchase? Failing to account for this is leading to many of the nation’s foreclosures.

Many lenders are offering loans that start below the prime rate, but go up over time. You may think that your job situation or income will improve to match the rising mortgage costs. On the flip side, though, anything can happen. Being realistic means that if you cannot afford the payment which is eventually coming, should you really plan on taking that loan?

National finance columnist Michelle Dillingham (www.firstladyoffinance.com) recommends this personal test to determine what level of loan you can afford. Let’s say that you are now meeting your obligations with a rental cost of $1000. The total cost of buying your home, including all of the new bills you will face, is going to be $1800. Before you take out such a mortgage, see if you can go six months depositing $800 into a savings account in addition to all your other bills.

If you cannot, you need to set your sights lower on your amount of financing, no matter what the lender tells you about your qualifications as a borrower. If you can deposit the extra for six months, consider the money a hedge against future repairs or unexpected disasters. Actions like this will help you avoid becoming a foreclosure statistic.