Don’t Fall For That Unrealistic Mortgage Offer
Most house hunters begin the search process armed with at least a loose monthly budget that informs their purchase price limits, yet research shows that as many as 35 percent of approved mortgages are financially unrealistic for consumers. This disconnect is likely responsible for a huge percentage of the 7 million Americans who lost their homes to foreclosure in the years following the 2008 financial crisis, and it’s still impacting homeowners today.
How do you say “no” to these pie-in-the-sky mortgage offers? Conventional wisdom from real estate professionals and financial advisors says the following three steps will help guard against falling into the unrealistic mortgage trap.
Understand that you know your limits better than lenders do. It can be tantalizing to be approved for a $200,000 mortgage when you thought you could only afford $150,000, but a mortgage application simply doesn’t capture all the pertinent information about your life and future plans that is needed to determine how much house you can afford. A lender looks at hard numbers; you need to consider germane information about how many children you might have, what your retirement savings goals are, and more.
Don’t make assumptions about your future income. Lenders tend to assume income growth when evaluating a mortgage application, especially when the prospective buyers are young and just starting out in their careers. But while we all want to believe our incomes will grow in the future, that’s not always the case. Maintain a healthy amount of skepticism and plan only for the home you can comfortably afford with your current earnings.
Know the true meaning of your loan terms. If your lender is using terms like “variable rates,” “balloon payments” and “short-term mortgages,” start asking questions. Each of these loan instruments can make monthly payments seem affordable in the present, but they spell much larger payments down the road. Always ask questions about terminology you don’t fully understand, and only commit to loan terms that continue to work for your finances well into the future.
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