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Avoiding Foreclosure in Today’s Market
Recent years in real estate saw rapid appreciation and record-low interest rates, a climate that many Americans found ideal for homeownership. Unfortunately, these circumstances had unforeseen consequences. Due to high prices, many homebuyers extended themselves beyond the recommended 28 percent of gross income for housing. Lenders also worked out creative financing techniques that would obtain financing for less-than-ideal candidates or for homebuyers who wanted to buy beyond what they normally would. No-down-payment, interest-only, piggyback loans and negative amortization are just some of the options on the market that have led to problems.

T.J. Marrs, a real estate author and speaker told that, “the chance of a significant increase of mortgage defaults is definitely on the rise in the U.S. The basic problem is that many people have chosen to obtain mortgages which have built-in negative amortization. This means that their balances will actually be increasing rather than decreasing with their monthly payments. Additionally, these mortgages will have an automatically increasing payment over a period of time.”

For many homeowners in the past, it has taken severe circumstances, such as an illness or job loss, to force a homeowner into foreclosure. With the precarious finances of today’s homeowners, homeowners are more easily forced into situations—perhaps due to an economic downturn or a personal difficulty—where they can less easily cover their mortgage payments. Soon after, the bank steps in to repossess the house. If you are a homeowner or are thinking of becoming one, there are smart steps you can take to avoid becoming a statistic.

Create a Budget
Living by a budget will help you prioritize your spending and put it toward the items that are most important each month, such as making your mortgage payment. It will also help you identify areas in which you could tighten your spending on frivolities. For instance, you could save $100 a month if you chose to make your lunch from food from the grocery store rather than spending $5 to $6 eating out every day.

If you are considering purchasing a home, you should create a budget at the earliest possible stage. As lenders tighten their criteria, you will need to show that you will have enough money to cover your expenses, in addition to a mortgage payment and property taxes.

Don’t currently have a budget? Whether you are a homebuyer or a homeowner, you can easily create one by tracking your expenses over the course of a month and creating a realistic budget based on how you live. You can then make adjustments to less important items, and make sure you live by them.

Save for a Rainy Day
Savings are very important for homebuyers and homeowners. Financial planners recommend having a six-month financial cushion on-hand in case of emergencies, such as lay-offs or long illnesses. If you want to lower your risk of defaulting on your home loan and ending up in foreclosure, you have to leave some breathing room in your budget. If tough times do hit, you can direct your savings toward making your mortgage payments.

Be Realistic
Real estate is a fantastic investment, and is often one that appreciates significantly over the long-term. However, many homebuyers using an interest-only or negative amortization loan are assuming that their home will appreciate fast enough to offset the amount paid in interest plus any additional principal. This is because these loans don’t provide for monthly payments large enough to pay down the principal. This may pay off in white-hot markets with little potential for downturns, but you would need to be very sure before making that kind of gamble. If you find that your financial basis is shaky, it may be better to wait to buy a home or to buy a less expensive home.

Shop Around
Just because lenders are upping their standards doesn’t mean you still can’t look for the best loan for your financial situation. In fact, there is so much competition now that you may find it easier to find financing that makes sense for your situation. Investigate the different lending options and their pros and cons. You should also check out different lenders to find out what deals are out there. The right loan from the right lender can save you thousands of dollars. Current homeowners should do the same thing and keep a careful eye on the interest rates and whether it makes sense to refinance.

Plan for the Future and Be Flexible
A lot of life changes can happen suddenly and unexpectedly, ranging from divorce to illness to job loss to death. If you are prepared for any possible changes and have a safety net that allows you to still pay your mortgage, you are in the best possible shape. The key to avoiding foreclosure is to leave room for the unexpected and always pay your monthly mortgage payments.

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