Home buying has gone from being a "sure thing" to what seems like a scary gamble.
With real estate talk dominated by foreclosures and price reductions, it's natural for anyone buying to worry that they'll make a big blunder.
University of California, San Diego.
"We tend to over-react [to news]," Amir observed. "Which in this environment means that we will over-concentrate on the financial aspects of home buying and maybe not enough on what type of home we really want."
Still, it's difficult to focus on floor plans when you're worried about becoming a foreclosure victim.
Experts, however, can offer some questions to ponder so buyers can avoid the mistakes of the past:
* What would you qualify yourself for? Used to be that lenders had a strict rule: Your mortgage payment, combined with other regular monthly debt, couldn't exceed 36 percent of total monthly salary.
Lenders didn't like such stringency, "because they knew that people had differing capacities to handle debt," said Jack Guttentag, who runs the Web site, mtgprofessor.com.
So when technology came on that could sum up people's facility for handling debt with a credit score, lenders gave high-scoring borrowers the leeway to decide payment size for themselves.
"The thinking is: 'You've been smart about your debt so far, so we trust you,'" Guttentag said.
But that message got garbled. Instead of hearing that their score indicates they know what fits their budget, buyers were urged to take on as big a mortgage as possible.
Some lenders even found a way to get big mortgages approved for those without good scores, by telling them they could inflate their salary with a "stated income loan," which didn't require verification, said Michael Shea, executive director of housing at ACORN in Chicago.
Besides that, lots of interest-only and adjustable mortgages were sold to borrowers because payments were cheap for the first year or two -- only to rise to unaffordable levels later. Now, more lenders are looking more carefully at a borrower's ability to pay, but buyers still need to make their own assessment, said Allen Fishbein of the Consumer Federation of America.
The lesson: Be honest with yourself -- and everyone else -- about what you can afford.
*Do you know what you're signing? Lots of papers are presented to buyers, who typically haven't made lots of prior home purchases.
Inundated with unfamiliar forms and contracts, buyers are tempted to take the advice of a lender or agent that's all fine with the fine print.
All may indeed be well or you could be signing off on provisions you'll regret, such as a prepayment penalty that will cost you thousands if you want to refinance or move soon.
Attorneys are not required to represent home buyers, said Celeste Hammond, director of the real estate program at John Marshall Law School. But in the Chicago vicinity, most buyers do hire lawyers, and they should have them examine their mortgage contract as well as the sales contract, said Hammond.
The problem, Hammond said, is that borrowers or their attorneys see the actual mortgage note for the first time at closing. Borrowers do get a good-faith estimate and a truth-in-lending statement before that, but lenders aren't strictly bound by these so Hammond suggests showing your attorney a copy of the loan commitment -- usually issued a couple weeks after you apply for the loan. That will provide information on key features, including whether there's a prepayment penalty.
The lesson: Get a read from an expert source who doesn't stand to profit from the sale or loan.
*Are you banking on appreciation? When prices were on the way up, lots of buyers received financing totaling the full purchase price.
Lenders, who should have known better, thought that even if homeowners moved or refinanced within a couple of years, there would be enough of an uptick in value to pay sales commissions or refinance charges, said Guttentag.
Now it's more difficult for buyers to be approved for a loan for 100 percent of the purchase price because lenders have learned that home values can fall below the mortgage balance.
Indeed, home price appreciation is just a side benefit to owning, added Shea. You'll probably make money -- but maybe not for years.
The lesson: Don't expect to garner a certain price within a certain time frame.
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