Unless you've been living under a rock for the last few months, you've heard about the collapse of the subprime mortgage market, in which a slowdown in the housing market (among other things) led to an increasing number of defaults on the "easy credit" home loans that have been so popular in recent years. The effects of the slump have been widespread, hitting everyone from homebuilders like Toll Brothers
Even lenders with only mild exposure to the housing market, such as student-loan specialist First Marblehead
It's a big mess. For most Fools, the best thing to do will be to hunker down, watch for opportunities to add to stock positions, and ride out the market storm as best you can. At this point, nobody really knows whether the damage will be minor or widespread, but it's pretty safe to say that this, too, shall pass.
Just the beginning?
But for Fools looking to buy a house in the near future, the market slump is a mixed blessing. There are some great deals out there, to be sure, and they aren't going away anytime soon -- last week I mentioned that homebuilders are resorting to incentives and huge discounts in order to move inventory. According to yesterday's report from the National Association of Home Builders, even these discounts are failing to ignite the market, and they expect the slide in prices to continue for at least several more months.
On the other hand, lenders and regulators have predictably reacted to the crisis by dramatically tightening mortgage standards, which combine with rising interest rates to make mortgages both harder to get and more expensive. Even couples with good credit who would have breezed through the approval process a year ago are now being told they need to have more savings, or a larger down payment, or both. And first-time buyers, even those with plenty of cash and strong incomes, are sometimes finding themselves limited to mortgages with monthly payments close to what they currently pay in rent, because of concerns over their ability to budget around much larger payments -- what the mortgage industry calls "payment shock."
What to do
As fellow Fool Dan Caplinger pointed out last month, Foolish homebuyers in the current market -- especially first-time homebuyers -- should start by talking to a lender or mortgage broker before hitting a single open house. Run the numbers, consider the rates (and the current upward trend in rates), and get pre-approved for a realistic mortgage -- and then go house-shopping. This way, you can shop without fear of any unexpected surprises when it's time to buy. And that pre-approval gives you some security in the face of rising rates and credit standards that seem to get tighter every week. But before you go to the bank, spend some time reading through the Fool's Home Center so that you understand the ups and downs of the different types of mortgages.
And for extra homebuying guidance, check out the Fool's personal finance newsletter service, Motley Fool Green Light. The Home Matters area features a series of articles on home buying, including financing, choosing a neighborhood, and much more. And Motley Fool Green Light's members-only message boards are always open for your questions and concerns. Check it out today. It's free for 30 days with absolutely no obligation.
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