Mortgage Mayhem: How to Survive and Profit

I read two disquieting articles in The New York Times just two days ago:

“Credit Time Bomb Ticked, but Few Heard” provided a timeline that showed at a glance just how may subprime lenders have shut their doors since 2006. It also predicted coming bankruptcies and told the stories of young professionals who have put their home-buying dreams on hold while they ride out the crisis.

“Loan by Loan, the Making of a Credit Squeeze” was even more disturbing. It told the story of a husband and wife in Connecticut who bought their first house for a relatively modest $180,000, but then paid for a new furnace and unexpected home repairs using credit lines. They refinanced and folded that new debt into the mortgage, but couldn’t make the payments. They lost their house and are now renters again.

The situation sounds grim. But to put things in perspective, I’d like to point out that there are some very fundamental aspects of smart home financing that haven’t changed at all, despite the current trends:

• You have to defend yourself, because no one else will. Mortgage lenders are primarily in the business of writing loans. The fact that they qualify you to get one really has little bearing on your ability to make those monthly payments. You have to know. And remember, it’s not the government’s job to protect you from making mistakes either.  It’s up to you to make the numbers work, look at your income and decide how much debt to assume. (Notice that this advice always holds true, not only in times of trouble.)
•  If you are in a position to buy, move decisively to take advantage of the best current opportunities, like foreclosures and unsold new homes.  In any climate - good or bad - there are bargains out there if you know how to find them and negotiate purchases like a pro.
• Control and reduce your debt before you think about buying. A clear credit history and a reasonable debt load qualify you for a mortgage and help assure that you can make your monthly mortgage payments.  Yes, a mortgage lender will give you worksheets that help you qualify. But in the end it is up to you to decide how much debt, and what kind of monthly payments, you can handle.  So don't let yourself get talked into taking more indebtedness than you know you can handle.
• Don’t live in denial if you're already in trouble. If you own a home, your debt load is rising and you cannot make your monthly payments, you may have to budget, liquidate assets, encourage a spouse to return to the workforce, work a second job, rent out an apartment over your garage - or undertake other aggressive measures to increase your cash flow. Remember, the time to get that flow moving to positive is while problems are still small. 

 The real message is that even in difficult times, the fundamental rules of real estate success do not change, even though a lot of people suddenly discover just how important they are. The wise investor never loses sight of them and stays positioned to achieve success.