Mortgage Crisis: When "Next Time" Arrives

The mortgage crisis has been blamed on various economic factors but the main reason for the crisis was that many people over estimated their ability to finance mortgages that in reality they could not afford. On the other hand, mortgage lenders were not effective in evaluating the financial situations of the borrowers either. The combination of errors then, over the entire national industry, simply had to lead to disaster at some point.

There was an excessive supply of money at the beginning of this trend. Mortgage lenders and other investors were willing to give out loans to just about anyone in the hopes of gaining explosive marginal gain. The process of analyzing financial status was lax and you could get a loan for a house with no income at all. Since the crisis, banks and mortgage lenders have tightened the purse strings and your credit history and current financial standing is critical to having a mortgage pre-approved now, but during the boom basically anyone could get cash for a house.

Before taking out a mortgage to buy a house, self evaluation is important in guaging your household's ability to service the mortgage without really straining your resources to the breaking point. This is the biggest single reason so many people are in foreclosure right now. Using the excuse that Wall Street caused your situation just won't fly.

Even if a mortgage lender approves your application with only a 3 percent down payment, you should make sure that you have saved enough to manage the usual 20 percent down payment requirement. Monthly installments will be less and you will not strain to make other ends meet nearly as much as if you stress your limitations. It may mean that you have to wait a little longer before you can buy your house as you save more for the down payment, but it will also mean that you are better positioned to service the mortgage without a lot of stress.

Some lending institutions will insist that you have a financial reserve deposited with them so that you can still service your mortgage should the unexpected happen and you find yourself temporarily unable to bring in an income. However, even if you get a mortgage from other institutions without such a requirement, you should make sure that you have a cash reserve saved up in an account to serve the same purpose. This will go a long way to gibe you peace of mind if you ever find yourself in such a situation.

Getting a home is not just about buying the structure; you should take into account other costs associated with purchasing a new home. You will need to furnish it to make it habitable for you and your family. You will also need to take into consideration the costs of maintaining the house.  How much will it take to buy beds, seats, and a play house for the kids in the backyard etc? Should you need to redo the plumbing, how much will the plumber ask for his services?

Take an honest look at how much liability you have. Do you have a car loan? What is your monthly credit card bill? Your total debt load will have a huge impact on how you service your mortgage, so before you even consider applying for one, look for an accountant who can help you work out the numbers and advise you on whether it is a good idea to buy a house now.

You may have to wait a little longer to purchase your home if you follow these best practices, but if worse comes to worse your situation will not be nearly so dire. In the end, owning your home is the goal, and having it repossessed will take you years to overcome. The old saying "an ounce of prevention is worth a pound of cure" has taken on new meaning since the economy went South.