Certain rules about managing money are fairly obvious, and among the most basic is this one: "Don't get in over your head."
But things that seem like a good idea at the time - buying a house, for instance - can go horribly wrong. For evidence of that, just look at the last six years of record foreclosures in this country, which can be attributed to factors as diverse as folks being duped into taking on bigger mortgages than they could afford and to the waves of layoffs announced during and after the Great Recession.
Takeaway lesson: Getting smarter about money can only be a good thing, especially when homeownership is involved. There are just too many ways to end up in a hole.
As Mark Zandi, chief economist at Moody's Analytics Inc., of West Chester, sees it: "The financial literacy of the average American is nowhere near where it needs to be.
"How much we earn is very important to our financial well-being, but how we manage that income is equally, if not more, important," Zandi said. "That includes how much we save, how we invest our savings, and what debts we take on to supplement our income."
Home buyers tend to fall into two categories, according to Realtor/mortgage broker Fred Glick: "The number crunchers love to get all the details and evaluate them sometimes to a fault, and [the] others just want to get the bottom line and trust people to do a good job for them."
First-time buyers often "have no idea what their credit score is, and many still pay everything in cash," said Christopher J. Artur, a veteran real estate broker in the city's Mayfair section. "Good agents know they have to stay with these buyers, or the deal will fall through somewhere along the line."
And frequently, Artur said, first-timers believe that once they apply for a mortgage, they're in the clear. "They submit the application, and then they go and buy a car. The lender sees the new debt, and the mortgage is rejected."
Two things to remember if you want a mortgage: Do not create new debt until you walk way from the settlement table with the keys to the house, and pay all your bills in full and on time while the bank is considering your application.
In these tight-credit times, it is more important than ever to have your financial house in order before making a purchase as expensive as a home.
William J. Schroeder Jr., a bankruptcy lawyer in Colwyn, spends his days trying to help people who have gotten in too deep.
Like lessons on building relationships, "financial education needs to be started in school at the earliest time, as well as in the home," Schroeder said. "The fact of the matter is that parents do a poor job in both departments. The value in postindustrial, modern America is built on relationships and finance."
A foundation of that education is what experts refer to as the three C's of credit: character, capital, and capability of repaying the debt. You need all three before heading into homeownership these days, or must be willing to wait until you have them.
All three factors affect your credit score, which determines your chances of getting a mortgage at competitive rates. If your credit score is below 620, your chances of success are pretty slim.
Character actually means credit history, which takes us back to Artur's reference to the cash-only experience of many of the buyers he works with. Credit cards can be an open invitation to overspend, but having and using them creates the financial trail necessary for a mortgage lender to determine whether you are honest and reliable with payments. The trick is to pay balances off every month without fail.
Among the ingredients of your total credit picture is the length of time you have lived at your current address. If you move frequently, it arouses suspicions.
Another is how long you have worked at your current job. If you change employers frequently, questions will be asked since, to pay your mortgage on time and in full, you have to work.
Still another: your bill-paying habits. If you throw bills at a hat each month and pay only the ones that land in it, you are not the sort of credit risk lenders like.
Instead, pay your bills on time, and for late payments beyond your control, make sure you have documentation - an exchange of letters works - to show why.
One of Artur's first-time buyers recently was turned down for a conventional mortgage because she inadvertently bounced a check.
"It wasn't her fault, it was an accident, and she rectified the situation immediately," he said, but her application was rejected anyway. Fortunately, Artur said, the buyer had a 700 credit score and was able to get a Federal Housing Administration mortgage.
A lender will want to know if you have assets (capital) such as other real estate, personal property, investments, or savings with which to pay the mortgage in the event you or your spouse is laid off, has hours cut, or becomes ill and cannot work.
But even if you look good on paper, there is one more very big hoop you'll have to jump through, and that is providing unequivocal proof that you are capable of making timely payments.
To determine capability, you will need to provide current-salary details, list other loan payments, current debt, living expenses, and the number of your dependents.
If the last few years have demonstrated anything, it's that someone who can't afford a house right now shouldn't try to buy one.
That's one economic factor you can control.
Find out more about the keys to financial planning:
Contact real estate writer Alan J. Heavens at 215-854-2472, email@example.com, or @alheavens on Twitter.