One of the most important reasons we have a record foreclosures is the poor judgment made in selecting the right home mortgage loan. The homebuyers who have opted for nontraditional loans in the past are those who suffer most.

When homeowner or mortgage loan borrower fails to make three consecutive installment payments the lender is legally entitled to require the borrower to pay off the entire principal unpaid balance. This is a typical foreclosure situation.

While failure to pay is the primary reason the type of mortgage loan plays an important role in most foreclosures. Especially, during the last six years the percentage of homeowners who preferred Adjustable Rate Mortgage (ARM) loan increased from about 20 percent to 30 percent. There are also interest-only, payment-option, and other types of mortgage loans that create payment problems for homebuyers in later years.

Four common mistakes made in obtaining home mortgage loans

Mistake # 1: You assume that your household income will increase when the higher interest rate of the Adjustable Mortgage Rate (ARM) loans will become effective. Economic downturns and recessions are a major cause of unemployment and downsizing. Keeping your or your wife’s job even at the same level may not become possible. Be prepared and think twice when you opt for ARM.

Mistake # 2: You plan to sell your property when the higher interest rate or balloon payment kicks in. However, you may not want to sell your property when the real estate market downturns as is the case in 2006. Combination of a down-market coupled with higher interest rates makes your monthly installments difficult to maintain. Don’t wait until the last minute of your low, fixed rate period. Market your property when the market conditions are favorable.

Mistake # 3: All ARM loans are indexed with a margin. You need to know which index will be used for your loan. If it is indexed to LIBOR (London Interbank Offered Rate) then, your rate will be at the mercy of a foreign market. You also need to know the media where your index rate is announced. Try to get a loan indexed to a well-know index such as prime rate as published in the Wall Street Journal.

Mistake # 4: Buying a real estate property while the property values appreciate and assuming that this will go on. The home values have been on the rise for years. Many people have bought properties with ARM loans, interest-only loans, loans with balloon payment later, negative-amortization loans, and 125 percent financing. Appreciating home prices were behind this aggressive behavior. Don’t count on continued inflation.

Selecting the best financing is important so start with your foreclosure strategy and review tips for avoiding serious common mistakes in buying foreclosures.

Be cost-conscious all the time in applying for mortgage loans

Buying properties irrespective to the cost of financing is not something you should try to do. Real estate market has its own ups and downs as other markets. You should avoid these four common mistakes in applying for a mortgage loan as real estate investment is not a liquid investment.

FDIC (Federal Deposit Insurance Corporation) states: "Widespread marketing of nontraditional products could be raising the risk profile of some mortgage lenders and consumers." Nontraditional loans are marketed by sub prime lenders for those who cannot qualify for conventional loans. Aggressive real estate investors also get nontraditional loans when they reach their qualification limits.

Consider creative financing techniques if you are short of cash, need money for repairs, or have a bad credit history. However, keep in mind that nontraditional loans from sub prime lenders may cost a little bit higher as the lenders take more risk.

Of course nontraditional loans are not just a scam. However, resist the temptation of getting a sub prime loan if you qualify for conventional loan. “Trying to afford an unaffordable house” carries more risk than some homeowners can handle, Amy Crews Cutts, deputy chief economist for Freddie Mac says.

Lack of equity is major reason for many foreclosures. Getting the right loan will make it easier for you to increase your equity in your home. The property must appreciate quickly enough to provide a cushion for you when you need extra cash or a line of credit in bad times.

About the Author: John Anderson worked as real estate agent, Realtor® in Florida and Virginia and certified home inspector in California. He publishes foreclosure newsletters on bank and government owned foreclosures.

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