Avoiding a Home Foreclosure

No one ever wants or expects to have a life-changing situation that threatens one’s very financial stability, but things do happen sometimes that alter the way we approach our world. Be it job loss, income not keeping up with the cost of living, divorce, health issues or whatever the cause may be, no one can predict the future. And any one of these situations can send the owner of the American Dream into the depths of the American Nightmare — better known as foreclosure. Below you will find some helpful information on how you may be able to avoid foreclosure.

A home is one of the largest and most expensive purchases many people will make in their lifetimes. The best way to protect it is to avoid the potential of the foreclosure process from the get-go to the greatest extent possible — and without consulting a fortune teller.

Location, Location, Location

Three of the most famous words in real estate. One sure way to avoid foreclosure down the road is to select a location in a community, city or town that a home buyer wants to live in and that is within his or her financial means.

Get Pre-qualified for Financing Before Looking

Many potential home buyers get their hopes up based on what they’ve heard is required to qualify for a loan. The best way for potential home buyers to avoid foreclosure in the future is to have a lender review their financial picture and credit score up front to determine how much home they can truly afford. It is also important for the prospective borrower to ask questions of the lender regarding upfront origination fees and other costs, as well as whether mortgage payments will escalate in the future due to the use of a variable rate vs. a fixed rate of interest.

Search for the Right Home

Once a location has been selected, and the lender has come back with a pre-qualification letter saying that the home buyer can afford to purchase a home valued at a predetermined amount in that location, then it is time to start the search for the best home for the money, and one that meets the particular needs of the borrower.

Home Finance 101

Many homeowners who bought between 2004 and 2006 are ending up in foreclosure now because they bought more home than they could really afford. It wasn’t all their fault, however. Thanks to the various types of adjustable rate mortgages (ARMs) out in the market during that time — interest only loans, negatively amortizing loans and loans with low teaser rates, for example — many people did not truly understand what they were getting into when they signed up for these so-called “liar loans.” As a potential borrower the home buyer also has the responsibility to make sure he or she understands all of the terms of the loan they are signing up for — especially when the rate is scheduled to adjust up and whether there is a cap as to how much that rate of interest can adjust when it does.

Budget Yourself

One of the best tactics for self-preservation to avoid foreclosure now and in the future is to sit down and work out a personal budget before starting the home buying search in earnest. At a minimum, in some states at least one-third of a personal or family budget can be eaten up in paying for a home. In other states such as California, for example, that cost can go up to over 50 percent of the budget for the median-priced home. Also, remember that we are not just talking principal and interest on the loan. The homeowner has to figure on what is known in the industry as PITI (principal, interest, taxes and insurance) since most lenders require homeowner’s insurance and many counties around the country impose property taxes.

Once the basic costs of the home are included in the budget, then there has to be allowance for maintenance/repair costs, homeowner association fees, etc. Add to that car payments, car repair costs, the ups and downs of gas prices, utilities like electricity and gas, trash collection, cell phones, FOOD, dry cleaning bills, music lessons, etc. You get the picture! The potential homeowner has to put any regular monthly costs into the formula to figure out whether they can really afford the home they want to buy.

Without being clear about these issues up front, the prospective home buyer is entering the process over their heads with a good chance of ending up in foreclosure some day — just from a financial perspective and without all of the unknowns the future holds for us.