Avoiding Problems with Your New Home Loan

By Karen Lawson
LoanPage.com Columnist

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Recent news includes frequent reports about non-standard home loans. Some homeowners are having difficulty making payments due to "exotic" mortgage loans that have features such as rapidly adjusting interest rates and negative amortization. If you're looking to buy a home, here are some tips for avoiding trouble.

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Are You Ready to Buy a Home?

There are compelling reasons for buying a home in today's market. Home values have decreased in many areas, and there may be tax benefits associated with homeownership. Two of the most essential criteria for buying a home are:
  • » you want to buy it
  • » you can actually afford it!
Preparing for homeownership can supply the financial footing you'll need to avoid future problems.

Evaluating your Credit and Finances

Knowing your credit score before shopping for a new home loan is essential. Generally, the lower your credit score, the more likely you'll be offered a mortgage through "sub prime" lending programs. It can be tempting to get a mortgage with a very low down payment and "no documentation," but this can lead to trouble. Here's why:
  • » You'll need sufficient savings for emergencies.
  • » Your mortgage balance may exceed your home's value in declining markets.
  • » Not understanding the exact terms of your mortgage can have consequences later (rapid adjustments in interest rates, negative amortization, or an early payoff date).
  • » If your credit score is low, you may pay more for a mortgage than if you take time to boost your credit score before buying a home.
Taking time to put your financial house in order today can help you buy (and keep) your real home later.

About the Author
Karen Lawson is a freelance writer with extensive experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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