Drama-Free RE: Top 10 Ways to Finance a Home Without All the Drama

By Tara-Nicholle Nelson, FrontDoor.com | Published: 4/14/2009

Learn from the mistakes that caused the foreclosure crisis: Let your household spending plan and a reality-based projection of your income over time dictate how much you pay for your home.

#9: Foreclosure-proof your home, before you even buy it!

The finance fear factor involved in buying a home has grown particularly intense in the aftermath of the foreclosure crisis. Seeing constant news reports about the tragic consequences of bad real estate and mortgage decisions makes it tough for buyers not to wonder, "how can I avoid that?!" If you're about to buy a home, and you've had this exact thought, you're in luck -- learn from their mistakes and position yourself to avoid foreclosure in just a few simple steps.

Think long term. Don't buy a place planning to sell it in a year. Really, you should only buy if you'll be comfortable owning the home for at least four or five years. As we've seen recently, one year you might be able to sell at top dollar in just a few days, and the next year it might take months to move the same house at a deep discount. If you plan from the outset to commit to the home for a few years, your home and loan choices will be less likely to force you into a financial crisis.

Intelligent (mortgage) design. Take charge of your mortgage choices and make sustainability your goal. Let your household spending plan and a reality-based projection of your income over time dictate how much you pay for your home. Tell your Realtor and mortgage broker how much you can spend on housing every month, rather than letting them tell you what you can afford. That may mean you end up buying a lower-priced home than you qualify for, a decision many owners who have now gone through foreclosure wish they had made back when they had the choice.

Sustainability should also be your guiding force when it comes to the type of mortgage you choose -- with so many low-interest mortgages with fixed interest rates and payments available, it just doesn't make sense to take on a loan where your payment will double in a year or two (or three, for that matter)! Actually, don't make any mortgage move where your ability to hold onto your home relies on your ability to refinance your home in less than five years -- that's like betting your home on a short-term prediction of home values, and that's not a good move.

Cultivate a cushion. Saving money hasn't been a priority of American homeowners for some time now. When everyone's home was wildly appreciating, there was always cash to be had from equity lines and loans. With no real savings, though, even a temporary job loss doomed homeowners to foreclosure. To insulate your home from foreclosure, start the savings habit and shoot to create an emergency cushion of six months' mortgage payments and other living expenses.

Get a shredder. Homeowners who used their homes like ATM machines have been much more likely to end up in foreclosure. So, decide in advance to avoid frequent or excessive borrowing against the equity in your home. And arm yourself against the barrage of equity credit offers you'll get as a homeowner. Be prepared to shred the junk mail that comes before you have a chance to start daydreaming about that Bahamas cruise you could take if you just got a small equity line.

Put a Plan B in place. Income glitches due to a death in the family or a job-stopping disability lead to almost as many foreclosures as mortgage problems. Make sure all wage-earners have life and disability insurance policies in place to keep one unfortunate event from turning into a double-whammy.

NEXT: #8: Get a clue about cash to close >>

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