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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.
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