Debt to income ratios have increased for some lenders. Tax liens and judgments related to personal mortgages are also changing. Both of these moves may make it easier for more people to qualify for a mortgage. More mortgages and rising interest rates could very well spell better business and larger profits for banks and other lenders. For consumers to gain advantages from these changes, consumers must start saving early.

New rules affecting mortgages and other loans could put consumers at risk

Consumers also need to money saving and disciplined, the earlier consumers start practicing these skills, the better. Why? Changes impacting home loans could put consumers at risk of defaulting on mortgages that they may have been better off being turned down for. For example, being allowed to buy a house even if it causes you to take on a 50% debt to income ratio could put you under water. Long range effects of being allowed to take on more debt and still get a mortgage approved include:

  • Poorer money management skills – Because consumers know that they can carry more debt and still qualify for a home loan, consumers might relax their spending habits. This could set consumers up for financial ruin should these same consumers get their work hours reduced, lose a job or experience a medical emergency that forces them to tap into their personal savings.
  • Higher interest rates – The more debt that consumers take on, the more interest they could end up paying. This alone could extend the life of a loan across two more years.
  • Lower home sale value – Should requests to take on more debt be approved by lenders, homeowners might have to stick with a house longer than they want. Should the housing market shift downward, these homeowners could end up living in a house that is valued below what is owed on the property.
  • Less capital to pass onto children – Greater debts could leave homeowners with less to will to their offspring. Avoiding this and other draw backs requires discipline and honesty.

Personal honesty and insightful review are the home buyer’s responsibility

Qualifying for a home mortgage may be a sign that your finances are in order. On the other hand, it could also set you up for financial disaster. Rather than relying solely on the word of a lender to know whether your current finances are truly healthy, take an honest assessment of your personal finances.

After all, only borrowers fully know what their future spending plans are. Only borrowers know if they are giving a portion of their income to assist an adult child, a friend or another relative until that person gets out of a financial hole. More importantly, borrowers know how disciplined they are with money.

On paper it might look as if borrowers are solvent and disciplined. In actuality, these same borrowers could be partially relying on financial help from family, friends, and income generated from events like yard sales, flea markets and online ad hoc sales. The more honest borrowers are with themselves and lenders, the better chances they might have of not taking on too much debt, the better chances they might have of being patient and working their way into the home of the dreams absent regret. Starting on this path early can pay off hugely.

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