Sub prime – What will you do now?
Do you remember a few years ago when interest rates were the lowest ever? Banks were bending over backwards to offer adjustable rate mortgages (ARMs) to buyers who were more than happy to pay whatever a seller asked for a new home. Well, in 2007 those ARMs started adjusting with a vengeance and monthly payments doubled and even tripled for some borrowers. Borrowers could not make the payments and defaulted. Banks foreclosed, and the sub prime lenders started to go out of business, one by one.
Today about one in eight ARMs totaling more than $325 billion are in foreclosure. Another $300 billion in sub prime ARMs are due to “adjust” in the next two quarters. Lenders are tightening their standards and that is making it more difficult to buy your next home. So what shall you do to make sure you stay on track to buy your dream home this year? Here are some suggestions…
1. Save more. Now more than ever your down payment is critical. Open an account just for your down payment. When you get paid, put a piece of that paycheck into that account without thinking. Pay yourself first. Ask your employer to deduct it automatically via wire transfer. They will, if you ask.
2. Create a time line. If you save $100 from each biweekly paycheck, it will take you almost two years to save $5000. How can you speed things up? What can you sell? Where can you save money?
3. Fix your credit. Pay bills on time. If you are overextended, then spread out your payments. Call your creditors and ask for new terms. If they say no, then call their competition, get the terms that work well for you and transfer your balances to the competition.
4. “What if” your bank to death. Call up your bank and ask questions. What if I tried to get a loan now? What would my rate be? What if I got rid of this debt? Would it make a difference? What if my income was $10,000 higher? What then? What if I got rid of this issue on my credit? You can do the leg work now to get yourself ready for later.
5. Find an honest broker or banker. Don’t just go with the person that promises you that they can get you the money. Find someone honest that will tell you no today, to a loan that will sink you later. If your broker doesn’t calculate your debt ratio, and help you with your other income ratios, then dump them. Find a mortgage broker who is also a financial planner. Your house won’t be your only expense. Every now and then you will want to take a trip or eat out. A planner will give you a livable plan.
One hundred percent financing is rare today. The best way to keep a monthly payment low is to put more money down. Start a plan today for a better tomorrow. You can find some recommended professionals on my Neighborhood page….or just Ask Rey.