Six Ways to Avoid a Mortgage Mess

With foreclosures on the rise, lenders have been blamed for aggressively qualifying consumers for mortgages they couldn't afford. While there's no doubt that lenders are partly responsible for the mess, there's plenty of blame to go around, and borrowers need only look in the mirror to find where to start.

Here are six very common mistakes made during the new loan process. Avoiding these can help you avoid foreclosure and save a bundle.

Mistake 1: Believing You're Qualified for the Loan, When You Aren't

Good news! The lender says you're qualified for the loan. Or is it good news? For starters, if you have applied for an adjustable-rate mortgage (ARM), the lender has probably qualified you on the basis of the initial rate, or "teaser rate."

The initial rate you pay is fixed for a set period, such as one, three or five years. After that, the rate is likely to increase, since the initial rate is artificially low. There have been calls from Capitol Hill for lenders to qualify borrowers at the "fully indexed rate," or what the mortgage rate would be if it were reset today.

But the mortgage lending industry is resisting this reasonable requirement. So it is up to you, the borrower, to consider how high the interest rate could possibly go, and whether you could still afford to pay the mortgage under that circumstance. Ask your lender to supply, in writing, a list showing what your loan payments would be at various rates, including the highest possible rate.

Mistake 2: Not Considering the Taxes or Insurance

In addition to the principal and interest portion of your mortgage payment, chances are that your monthly payment will include a portion for taxes and insurance.