8 Ways To Reduce Your Mortgage Risk Exposure

Mortgages are long term obligations. 30 years is a common term. These longer terms allow borrowers to make lower monthly payments, however, they also expose the borrower to foreclosure risk over a long period. Over the life of their mortgage, borrowers will inevitability face challenging times amidst the good times. Prudent borrowers should plan to be able to face more than one significant challenge simultaneously. How can a prudent borrower reduce his or her exposure to foreclosure and other mortgage related risks from the beginning? Making the following conservative decisions should help reduce your risk exposure and increase your chances of successfully weathering multiple challenges simultaneously:

  1. Educate yourself and start planning early to qualify for the best mortgage possible.
  2. Buy a home with a purchase price that is significantly less expensive than you are approved for. The ratio of your debts to your income is an important measure of risk that lenders use. While you may be approved for a loan that puts you at a debt-to-income ratio of 40% or more, purchasing a lower priced home should reduce your loan amount and your debt-to-income ratio. With a lower debt-to-income ratio you may even qualify for better terms on your loan.
  3. Make a down payment that is a significant percentage of the purchase price of your home. 20% down or more can help you weather housing price declines and even avoid mortgage insurance.
  4. Maintain significant cash reserves that you can draw on in times of emergency. A safety net of 6, 12 months or more cash reserves can help you weather tough times.
  5. Talk to people you trust and find mortgage lenders with an excellent reputation. Compare rates and terms and choose the best mortgage for you.
  6. Get a mortgage that is well within your capacity to manage and tolerate risk. Most borrowers are best served by fixed rate mortgages. An adjustable rate mortgage (ARM) is probably not appropriate for you, if you: lack significant cash reserves, do not have a realistic capacity to significantly increase your income, do not have the ability to keep a close eye on mortgage interest rates; or do not understand how an ARM works.
  7. Thoroughly understand the terms of you loan before you sign. If you are getting an ARM, you should understand all aspects of it including, the floor rate, the interest rate caps and the worst case scenario. If your loan has a prepayment penalty, you should understand how it can limit your options.
  8. In addition to hazard insurance for your property, maintain adequate insurance for other aspects of your life including liability insurance, car insurance, life insurance.