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 t rouble 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.
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