The place was a dream: zebra wood kitchen cabinets, granite counter tops, and three bedrooms. It was also a lofty $300,000 more than our budget. But rather than being sane and telling our realtor no, I went home to crunch the numbers. I did it three times before I accepted that there was no way we could afford the apartment, monthly upkeep fees and a mortgage, no matter the interest rate. But two years ago, not everyone had my deathly fear of debt and bleak outlook about whether my job would continue paying me a living wage. The economy was booming and everyone thought they could afford that white-picket fence dream. Now, Wall Street is facing its worst crisis in decades and the problems are far from over. Not surprisingly, foreclosure rates are at a record high. According to the Mortgage Bankers Association, delinquent loans rose to 6.41% of all loans in the second quarter of 2008, an increase of 6 basis points from the first quarter and 129 points from a year ago. Of all loans, 2.75% are in the process of foreclosure.
So what happens when you buy a home that you really can't afford? When economizing doesn't work, people often liquidate assets and borrow from their 401K to keep up with payments. Talk about putting your financial future in jeopardy. If you continue to fall behind in payments, lenders start putting on the squeeze, firing off a letter and then 90 days later, a notice of default. "Once that notice of default is filed, everybody knows about it," warns Sharon Hays, a realtor at Coldwell Banker in Pacific Palisades. "It'll show up on your credit report."
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The picture can get worse – much worse. If you can't dig yourself out of a default, you're heading to foreclosure, which means your house gets sold at auction. Not only are you losing your investment, you're losing your home. Having a foreclosure on your credit report means a lower credit score, and, for seven years, you're going to be relying on cash. Loans for any big-ticket item, like a car, will be hard to come by. Landlords will be reluctant to rent to you unless you have lots of cash in the bank.
The pain doesn't stop there. If lenders suspects you have other assets or a healthy income, they may file a deficiency judgment against you, demanding you pay the difference between the amount they believe they can realistically recoup from your loan and the actual sale of the property.