Managing Your Mortgage
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
o r bankruptcy when emergencies arise.
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
have drawn up a budget before beginning your search for a home, making
allowances for such expenditures. If you did not, it is time that you
begin to 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 should have determined
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 o f 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 rep laced. 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.
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. Nonprofit
organizations, particularly housing assistance groups or counseling agencies,
may manage special assistance programs. State and local housing agencies
are also places to inquire to help.
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 of 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.
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. You can usually get a local real estate broker
to give you an idea of the current market value, free of charge. 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.
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 which 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.
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