How to Buy a Home During the Subprime Loan Crisis

Bills.com CEO offers tips to help homebuyers defend their financial security

SAN MATEO, Calif., May 30, 2007 - Last month, California mortgage defaults rose to their highest rate in nearly 10 years, an increase of 23 percent over the previous quarter, and a trend echoed across the nation. In response to the dangerous cycle of stagnant home prices and rising monthly payments, Brad Stroh, co-CEO of Bills.com, a free online consumer portal offering financial tips and resources, suggests how homebuyers can build their confidence that their new home will be the American dream, and not a nightmare. "Before you dive into summer house-hunting, take the time to evaluate your options and your abilities," Stroh suggested. "By understanding what you can reasonably afford, you can take steps to make a wise home purchase decision -- one you can live with for years to come." Stroh's tips include:

  1. Gauge readiness for home ownership. Home ownership requires a steady income, a reliable credit history, and the willingness and ability to stay in a home. Homeowners also must take care of the property to maintain its value. With changing interest rates and a sometimes-challenging home resale market, it is wise to be prepared to keep a home for several years.
  2. Understand credit ratings. Review credit reports annually. Visit the Web sites of the three major credit reporting agencies (Equifax, Experian and TransUnion) or visit www.annualcreditreport.com. Credit scores can range from 300 to 850. The higher the score, the better. A score below 680 usually results in a borrower being charged a higher interest rate or denied credit. If the report includes items that are inaccurate, request a correction.
  3. Estimate mortgage qualifications. Estimate a reasonable mortgage amount with a reliable online mortgage calculator, such as those at www.bills.com/calculators/. Enter salary and expenses to understand the approximate monthly payment. Remember: These calculators usually provide a monthly payment that includes only principal and interest payments. Actual mortgage payments may be structured to include costs such as taxes, home insurance, and, for those who put down less than 20 percent of the price, mortgage insurance premiums.
  4. Talk with experts. Plan to meet with several mortgage lenders to discuss options, available interest rates and fees. Learn about first-time-homebuyer financing programs, Federal Housing Administration (FHA) or Veterans' Administration (VA) loans, programs that assist with closing costs or down payments for qualified buyers, and whether programs allow buyers to use gifts or loans from family to help with down payments.
  5. Understand interest rates. Conversations with lenders will help refine a sense of available interest rates. Then, check again at a site such as www.bankrate.com or /home-finance/ to see average home loan interest rates. "Do not consider a loan with a rate that is much higher than the average interest rate," Stroh cautioned. "Extremely high rates can skyrocket expenses and increase the chance of defaulting on a loan. It would be better to wait a year or two and work to improve your credit score to obtain an affordable interest rate."
  6. Budget for the home purchase. Everyone should use (or create) a home budget and live with it for several months. People who have been renting will likely see higher total expenses when they purchase a home. Make sure the cost of a mortgage and additional costs for home maintenance, decorating and improvement are affordable before making a home purchase. "Remember, especially if you have good credit, the amount the broker says you qualify for may be more than you'll feel comfortable paying. Spend no more than you know you can afford," Stroh said.
  7. Don’t over-extend. Don’t get caught in an exotic loan product with a small monthly payment for the teaser period that then rises and drowns you. Now that interest rates have adjusted, many consumers who chose products such as option ARMs and negative-amortization loans a few years ago now are facing default or even foreclosure. If you are considering an adjustable rate mortgage or interest-only loan, take care to understand exactly when, and by how much, your mortgage payment can change in the future. Fixed-rate loans remain good, conservative loans. If you cannot afford a mortgage with a fixed payment, re-assess if now is the right time to buy that dream house.

Once buyers complete these seven steps, they can prepare to move into a home of their own, Stroh concluded. "Most importantly, they will have reduced your future chances of losing the home they worked so hard to obtain." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at /. Since 2002, Bills.com and its partner company, Freedom Financial Network, have served more than 15,000 customers nationwide while managing more than $350 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.