|
INTRODUCTION
Acquiring your
first home, or a larger one to meet growing family needs, usually focuses
all of your attention on accumulating the down payment and qualifying for
the financing on the property you have selected. There is a sense of
relief when the loan is finally closed and you have settled in the house.
It will not take long, however, before you will have to face the financial
responsibilities that home ownership imposes.
If you are a
first-time home buyer, many of the problems that you simply turned over to
the landlord (or your parents) are now yours to fix and pay for. If you
have moved from a small house into a larger one, you may find the expenses
of maintaining the property have grown along with its size. In either
case, careful planning and budgeting are essential in order to guard
against financial problems in the future.
Your home is a
major investment and you have a great deal to lose if you default on your
mortgage payments or fail to maintain the property. Planning for
unexpected situations as well as the routine costs of owning a home can
help you avoid foreclosure or bankruptcy when emergencies arise.
BE
PREPARED FOR HOME OWNERSHIP
The expenses of
owning a home go beyond the monthly mortgage and utility payments, and can
create financial difficulties, particularly for first-time home buyers who
have minimal cash reserves. Mechanical failures in the plumbing,
electrical and heating systems seem to occur at the worst possible times,
but have to be repaired. If you have purchased an older home, complete
replacement of water heaters, furnaces or kitchen appliances may be
needed. You should always draw up budget before beginning your search for
a home, making allowances for such expenditures. If you haven’t as of
yet, it is time that you begin to budget and accumulate adequate reserves
to deal with such emergencies.
In a newer
property, your immediate expenses may be confined to landscaping, interior
decoration and furnishings. Under normal conditions, mechanical items and
appliances will be under warranty for six months to a year and will not
require major expenditures, but may need minor repairs.
In an older
property, replacement of major items can be very expensive. You can
prepare for this by determining the age of the furnace, hot water heater,
air conditioning system, kitchen appliances and the roof. Your home
inspector's report probably noted the ages of these major items. If they
are older then half their expected useful life, you will need to plan for
the costs of the replacement.
Set up a budget
and plan for both regular maintenance and major repairs. Establish an
emergency fund for repairs and appliance replacement. Know what sources of
financing are open to you when a major item such as the roof or heating
system has to be replaced. These are things that can cost thousands of
dollars and you may have to finance them through a home equity loan, a
second mortgage or an installment loan. Determine which kind of loan you
are likely to qualify for, the pros and cons of the alternatives and have
a plan for dealing with a major expense.
Your budget
should also include a reserve for making your mortgage payments in the
event of illness or loss of income in the future.
PLANNING
FOR THE UNEXPECTED
While
over-obligating yourself or unexpected repair bills may jeopardize your
ability to keep up your house payments, the primary causes of foreclosure
and bankruptcy are unanticipated personal crisis. More homeowners lose
their homes because of illness, loss of employment or marital problems
than all other reasons combined.
None of us
factor these things into our plans for the future, but you should know
about some of your alternatives if you find yourself in such a position.
It is much easier to look at alternatives and plan an effective course of
action before you are in trouble and in a state of anxiety and stress.
Sometimes you
can see the trouble coming before financial problems begin. An advance
notice of a layoff means the family income will be severely cut back or
eliminated in the near future. A major medical operation or property
repair bill may be more than you can afford to repay, even with a short
term loan. You have to address the situation as soon as possible or risk
losing your home.
There can be a
number of local sources that can help you get over the hump. Churches and
civic groups may have assistance programs or may know what is available.
Non-profit organizations, particularly housing assistance groups or
counseling agencies may manage special assistance programs. State and
local housing agencies are also places to inquire.
IF
YOUR MORTGAGE BECOMES DELINQUENT
The day of the
month on which your mortgage payment is due, usually the first day of the
month, is set out in the mortgage note. Your payment is considered late if
the lender receives it after the due date, and the lender usually will
charge a late payment fee when the money is not received within 15 days of
the due date (the timing and amount of late charges may vary from lender
to lender). Payments made, including any late charges assessed, before the
next payment due date will be accepted by the lender, but if you owe two
or more mortgage payments, your home is in serious jeopardy. Unless
specific arrangements are made with your lender, you must remit all
payments and late charges before the money will be accepted and the loan
considered current.
When three or
more mortgage loan payments are due and unpaid, the loan may be given to
the lender's attorney and foreclosure proceedings initiated. The entire
balance of the loan may be due and payable immediately. In addition to the
loan payments due, you are liable for legal fees incurred by the lender.
At this point, you are in serious danger of losing your home.
WHAT
TO DO WHEN YOU DEFAULT ON YOUR MORTGAGE
No lender wants
to foreclose on a mortgage. Foreclosure costs them more money than they
can make back from the foreclosure sale. Therefore, lenders do not
foreclose in order to make money, but only reluctantly as a way of
limiting losses on a defaulted loan. This is why, if you get behind on
your mortgage payments, your lender will work with you to devise a
practical plan to cure the default and bring the loan current. In order to
do so, however, you must stay in communication with your lender and be
honest in evaluating your financial situation.
The willingness
of the lender to work with you to get past your current problems will
depend heavily on your past payment record. If it shows consistently
timely payments and no serious defaults, you will find the lender much
more receptive than if you have a record of unexplained chronic late
payments.
If you are
falling behind in your payments, or know that you are likely to in the
immediate future, there are some steps that you should take before talking
with the lender about alternative payment arrangements.
First, you need
to prepare a monthly list of your income and expenses, using realistic
figures based on your current financial situation. You will also need to
put together a complete financial disclosure package, showing your assets
and liabilities, including all debts and monthly payments and when they
are due. Pay stubs, unemployment check stubs or other proof of current
income should be in the package, along with two years' tax returns. Get an
estimate of the value of your property. Finally, prepare a written
explanation of your situation for the lender and offer any plan or
suggestion you may have on how you can bring the loan current.
MORTGAGE
LOAN WORKOUT PLANS
A loan workout plan is an agreement between you and your lender that sets
out the steps to be taken to cure the delinquency and prevent loss of your
home. It may be written or oral and will have specific deadlines that you
must meet in order to avoid foreclosure. Therefore, it must be based on
very realistic estimates of your ability to meet the plan schedule.
The nature of
the workout plan will depend upon the seriousness of the default, whether
your financial problems are short-term or your payment ability has been
impaired for the foreseeable future, your prospects for obtaining funds to
cure the default and the current value of your property.
If the default
is caused by a very temporary condition and is likely to be cured within
30 to 60 days, the lender may consider granting you "temporary
indulgence." Some examples of cases where this approach would be
considered are where the house has been sold but the sale has not settled
or where an insurance settlement is pending. It is usually possible to
determine a date certain for curing the default. The lender will want
documented evidence, such as the sale contract, before granting
indulgence.
If you have
suffered a temporary loss of income but can demonstrate that it has
returned to previous levels, you may structure a "repayment
plan" to bring the loan current. This type of workout arrangement
requires your normal mortgage payments be made as scheduled, plus an
additional amount that will cure the delinquency in no more than 12 to 24
months. In some cases the additional amount may be a lump sum due at a
specific date in the future. Repayment plans are probably the most
frequently used type of workout agreement.
In some
circumstances, it may be impossible for you to make any payments at all
for some period of time. If you have had a good record with the lender, a
"forbearance plan" will allow you to suspend payments or make
reduced payments for a specified length of time. The forbearance plan will
be in writing, have a definite term and spell out the method of ending the
delinquency. In most cases the length of the plan will not exceed 18
months and will stipulate commencement of foreclosure action if you
default on the agreement.
Any workout
agreement is a last-ditch effort by you and your lender to avoid
foreclosure and keep you in your home. It is not a substitute for good
budgeting and financial planning on your part and will probably not be
available if your payment record has not been consistently good up to the
present time. Lenders will work closely with good borrowers who are having
a period of real emergency and hardship, but are not inclined to cooperate
with those who demonstrate little financial discipline.
|
Loan
Library 
