Shopping for A Mortgage? Buyer Beware!

Money troubles are continuing for home buyers even with the better than rotten credit (FICO) scores of the sub prime borrowers that triggered the mortgage crisis. Late payments, delinquencies, defaults, and foreclosures won't go away for many buyers who now appear 'not-so prime'.

There is some good news in this mess. The housing market melt-down and the credit-crunch may have saved you wannabe home buyers from the debt crushing others who might have become your neighbors. Wait long enough and you might even save money with a bargain on Foreclosure.com. But with foreclosures up almost 50% in the 3rd quarter and just 18 months into this downward spiral, my gut instinct says it's still too soon to start bargain hunting.

It's long overdue that banks and mortgage lenders got their heads out of the trough and put a rein on their appetite for profit. Lenders, read my lips. "STOP LOANING MONEY TO PEOPLE WHO NEED A MIRACLE TO PAY IT BACK." We all pay a price for this craziness and deceit. Not surprisingly, the truth is still escaping from the septic system as witness the Citibank revelations last week. Canadian Imperial Bank of Commerce also gave notice of their financial losses. And the forced auction of Northern Rock PLC (Britain's fifth largest mortgage lender) is another of the many global casualties.

Frankly, I'm delighted that the painful indigestion lenders are suffering from their self-inflicted over-indulgence (and a predictable lack of miracles) has them rejecting more mortgage applicants than the norm two years ago. Or even six months ago, I hear. This is prudent.

Sure, it's also disappointing when you are eager to fulfill your dream of home ownership...but the risks often outweigh the rewards. The affordability measures lenders used were at the root of many home buyers problems. To say they were generous is an understatement.

Your salary alone is not the only yardstick you should consider to assess your ability to pay (repay). Of course, the arithmetic can be daunting for your due diligence but don't be fooled by sweet-deal offers (check the fine print) at teaser rates when your underlying ability to pay is compromised by years of debt-fueled consumption habits, periodic or current reductions of income, health care costs or any of the above.

No blame implied here but a reality check is timely. Your freedom and today's lifestyle are at stake if you equate debt with slavery. Those who have "been there, done that" know of what I speak.

Whether you want a new mortgage or are re-financing, first examine your other financial commitments and debt obligations. Then switch gears and ask yourself these two emotionally-driven questions:

1. Can you live without the furnishings (or kitchen reno, etc.) you imagine will make that new home perfect once the deal is done? Or will that become another credit card purchase with a long term debit balance that is revolved over years of minimum payments? Home buyers often take on new debt from other lenders after the fact that makes the total debt load unmanageable.

2. Will you be able to sustain your current lifestyle once the monthly mortgage payments start? (Can you still be happy without the dinners out, another vacation, and the next new thing? You can't be sure without some accounting of your current spending.)

[Check out my test, Estimating Your Future Income Prospects on page 79 of SAVING Is for Suckers. To order the book see www.billmackay.net]

No matter how much you want that house with the white picket fence or that condo with the concierge don't let your optimism nor the lender sucker you into a mortgage that will ultimately be a monkey on your back. The costs are emotional as well as financial. Stress comes along for the ride. That's one of the bargains of capitalism you want to avoid.