Managing
Your Mortgage
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 o r 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 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.
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, ma y manage special
assistance programs. State and local housing agencies are
also places to inquire to help.
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 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.
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. 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.
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
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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