Can you buy a home with today's financial crisis?

By KIM ROSENBERG & TODD HING

article created on: 2008-10-01T00:00:00

The news coming from the financial pages is rather discouraging these days, a fact that has made many consumers leery of the credit markets.

However, today’s credit markets are not a fearsome place for those who are properly prepared. While mortgage lending has tightened up, it has not shut down completely.

The recent woes have contributed in some ways to making home loan shopping a bit safer for the average consumer. In response to the loose lending practices that have been cited as a major factor in today’s sub-prime lending meltdown, standards have been tightened considerably, making it much more difficult for consumers to qualify for home loans that they cannot truly afford.

In 1995, lenders were encouraged to relax lending standards to encourage home buying. Banks and other lending institutions opened their doors to people who could not previously afford to buy a home or who were otherwise categorized as bad risks. These loans were generically called sub-prime loans.

The effect of the relaxed standards worked well in an economic climate of increasing housing prices and decreasing lending rates coupled with low initial rate adjustable rate mortgages. The law of supply and demand kicked in in the middle of 2005 according to the National Association of Realtors statistics, and the 10 years of unprecedented demand was replaced by too much supply.

Two key things went wrong. First, housing prices dropped and second, the lending markets got stuck with enormous bad debt.

An example of this would be the person who put zero down on his or her adjustable rate mortgage. Even though this mortgage was completely approved by the lenders and the banks, the person got caught in a pickle. As the price of a $300,000 home dropped to $260,000 and the 4 percent interest rate on the ARM rose to 6 percent many people stuck with those mortgages lost their ability to pay the monthly bill.

Consumers who lost value on their homes also lost their ability to withdraw equity from them.

For those not currently committed to a mortgage, but hoping to buy a home in the future, that may mean taking a more aggressive stance towards working to reduce credit card and other consumer debt, as well as taking steps to adjust their lifestyle so that they are living firmly within their means to a degree that they are able to build savings, in addition to limiting new debt.

That may be a matter of economizing by making affordable choices and living not just in the now, but with an eye on the future as well.

If you can keep making the payments, do so. You are fine. Nothing is going to happen to your mortgage.

If you can’t make your payments, call your bank and talk to them. If you talk before you get into trouble they can help you out. If you wait until you are in trouble then it is harder to get help.

Watch your credit score. The banks want very simple loans and no complicated situations. Get an equity line of credit on your house if you can and don’t use it. It can be a good emergency backup plan.

Many people can still qualify for way more debt than they can actually manage. Don’t borrow more than 20 percent of your income to be safe.