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. Non-profit organizations,
particularly housing assistance groups or counseling agencies, ma y
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 ha s
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.