Buyer Beware

A non-profit housing specialist relayed this story about a recent house closing in my community. Buyer and lender were ready to sign on the dotted line when the phone rang and the transaction ceased. The mortgage company had stopped processing mortgages. Both parties were left high and dry.

Scenarios like this reflect the harsh reality of the current mortgage-lending market in New Hampshire and across the nation. Individuals and families wanting to buy a home are finding limited opportunities for funding. Some lenders have gone out of business; many others are unable to get enough resources to lend money to prospective homebuyers. Foreclosure numbers are skyrocketing. The American Dream of home ownership is quickly getting out of reach, even for many middle-income families.

If your credit score is considered "good," also called "Tier 1," you qualify for the best rates and deals. If your credit score reflects past problems, companies take a chance in loaning you money, so it will cost you, the borrower, more to get money for a mortgage. Basically, the more you need the loan, the more it will cost you.

If you get a mortgage that can be insured, perhaps by FHA, Fannie Mae or Freddie Mac the company lending the money has a guarantee that if you default on your loan, they still get their money. In the subprime market there are no such guarantees, so lenders take more of a risk. (Subprime mortgages are home loans made to individuals or families who have a credit score of 650 or below.) Therefore it will cost you more to buy a house and failure to pay may mean losing your home and any equity you may have in your house.

Credit guidelines
Consumer groups have been working to reduce the number of loans made in the subprime market. Why? Because buyers with poor credit often realistically can't afford the mortgage.

Guidelines from the U.S. Department of Agriculture's Rural Development agency for mortgage loans at 1 percent interest require that your mortgage payment (principle, interest, taxes and insurance) be no more that 29 percent of your total gross income. In addition, your total debt load, including mortgage, should be no more than 41 percent of your total gross income. If your loan rate is closer to the standard 30-year fixed-rate mortgage now at around 6 percent, the rules allow your mortgage payment to rise to 33 percent of your income, but your total debt load should still be no more than 41 percent.

The subprime market has higher thresholds that allow a buyer's total debt load to rise as high as 50 percent of total income. That leaves subprime borrowers with less than 50 percent of their total gross income to cover payroll deductions, food, clothing, heating costs, gasoline and auto maintenance, phone, electricity and other essentials. You can see how families with subprime mortgages can get into financial trouble quickly.

If your mortgage is adjustable, meaning your payment may be tied to an ever-increasing interest rate, you could see your monthly bill rise every six months. That doesn't take into account an increase in the yearly taxes on your property or your homeowner's insurance.

New Hampshire County Register of Deeds offices across the state report that the number of foreclosures has been increasing. Most counties are on pace to exceed the numbers recorded in 2006, with the busy season ahead of them.

Trouble making mortgage payments?
If you're having trouble making your mortgage payments, there are some steps you should follow to help protect your home investment:

• The Federal Reserve Board has identified resources that can help you when you are having difficulty making your mortgage payment.


• Contact your lender immediately when you run into difficulty. Some may let you set up a different payment plan.


• If you have steadily improved your credit score, consider refinancing with a company that offers a fixed mortgage.


• Consider selling your current home and buying a smaller, more affordable place place. You can pay off the first home and you may be eligible for a better mortgage plan than what you currently have.

Don't fall for quick-fix schemes
Be wary of radio or TV ads, print media or even phone calls that promise to "fix" your credit. Companies that want money up front to repair your credit are often scams. Individuals who fall for them often end up deeper in debt than they were before.

You can repair your credit by paying your bills on time and using your available credit carefully. The Federal Trade Commission has a publication Credit Repair: Self-Help May Be the Best http://www.ftc.gov/bcp/conline/pubs/credit/repair.shtm offers more detailed information.

Get any promises in writing. Check with the consumer protection bureau http://doj.nh.gov/consumer/index.html of the state Department of Justice (1-888-468-4454) to see if complaints have been filed against the company you are contemplating doing business with. Proceed cautiously.

UNH Cooperative Extension Educators in each county offer a variety of money management classes to help you manage your money. In addition, we offer educational publications on a variety of consumer money management topics.

By Deb Maes, Family & Consumer Resources Educator

Posted August 28, 2007 | TrackBack