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When you pay your bills, how do you prioritize?
Credit cards, mortgage, other bills? Mortgage, credit cards, other bills?
The normal payment hierarchy, which mortgage lenders expect, ranks mortgages as the top priority when paying bills.
This hierarchy was not managed during The Great Recession – and as most of us personally know, still has a toll on us to this day. Homeowners started prioritizing their credit cards higher than their mortgages. People were defaulting on their mortgages, yet they still made it a point to pay off their credit cards.
Mortgages fell to the wayside while credit cards were keep current on.
A patterned formed during this time; as home prices fell so did the amount of people who paid on their mortgages. This same correlation between home prices and mortgage payments was not seen in areas where home prices did not fall, or did not fall as dramatically (this varied from state to state and from region to region throughout the United States).
The reason:
The equity in many borrower’s homes was lost due to the rough shape of the housing market, and foreclosure on their homes was not immediate. People felt stuck – they had to priorities against the guidelines of the normal payment hierarchy in order to make it.
And so, an abnormal hierarchy was formed; people held more value in their credit cards and car loans than their mortgage.
Related: Buying a Home with Bad Credit
Credit cards are essential in many of our day to day lives – without them, without immediate money at our finger tips, life would not be the same.
Life wouldn’t be the same without vehicles either. For many, our vehicles are our only way of transportation. Without them many people who live an independent lifestyle would have to transition into becoming very dependent on others – not an ideal way of living in such an independently driven society.
In short, not having credit cards or a car would immediately and drastically change our lives – not paying on a mortgage to a home that has no true value just didn’t measure up on the priority list.
Ahhhh, and so we have it, the financial circle of life. But, don’t loss hope! Our ways of life change as the world and the society that takes up the world alter.
We are now in a transition!!
Now credit-reporting firms have seen a transformation from the abnormal payment hierarchy back to the normal hierarchy – it’s almost there!! This is an important step to increasing home values and getting our housing market back on track.
But why the transition back to normal?
Well, home prices are going up and have been for the past two years! The negativity of The Great Recession is simmering down. Equity is building. People are beginning to rank mortgages high again which means less people are defaulting on their mortgages.
That means lenders are slowly beginning to trust borrowers again. This is great news! Although lenders still have stricter guidelines than Pre-Recession they seem to be lessening them.
That means that people with poor credit who aren’t eligible for a mortgage might be soon – once lenders trust the economy again. Learn how to buy a home with low credit scores.