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 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.
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 of these major items. If they are older then half their expected useful life, you will need to plan for the costs of 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 future income.
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 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 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.
No lender wants to foreclose on a mortgage. Foreclosure costs them more money than they can make 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 steps 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 - and 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.