This is the official time of year for what I’ll call the “financial freak out.” Christmas is in the rear view mirror and the bills are showing up. That Christmas bonus at work (if you got one) is spent, and it will likely be March before you could hold out hope for a tax refund. Reality has set in. It’s time to face the music. The financial grim reaper is at the door. It’s time to pay the piper. With all that potential scariness in mind, I’ve decided that several posts I write are going to help you deal with the stress that comes with handling finances. Today, specifically, we’re going to talk about mortgage debt.
Last week I shared a HUGE list of tips for living debt free. In the coming weeks I’ve planned posts on scheduling your time more effectively, handling money with your spouse, plus an FAQ. I want your year to be the best one possible! Today we’re going to talk about the SERIOUS issue of overwhelming mortgage debt.
You’re Not Alone
When I wrote From Debtor to Better, the financial crisis was pretty much the news of the day. The “mortgage meltdown” was in full swing, and I was almost daily getting desperate emails or phone calls. The mass media has moved on, mostly ignoring those who are still struggling to find their way. It’s old news nowadays…but I know mortgage debt is still a major issue for many of you.
Are you wondering where the money to make your next mortgage payment is going to come from? Are you wondering if you’ll have to choose the house payment or the new clothes your kids need? Maybe you have a good friend who is drowning because they made a poor choice with their home purchase or were doing just fine until a job loss, divorce or other financial disaster hit. Foreclosure isn’t the only option. Let’s spend a little time on some alternatives. I want to equip you to be able to help yourself or those you love to deal with this financial nightmare.
Foreclosure
Definition: a legal process a mortgage lender can pursue in the event of non-payment to force the sale of a property (usually a home). That’s simple enough and we probably all understand it in layman’s terms: if you don’t pay your house payment, the bank can take your house. Foreclosure does not have to be the answer. There are plenty of alternatives, which we’ll see below. However, you need to understand the process and the impact of foreclosure if you’re considering it as your way out of a mortgage debt you can’t afford.
Deed in Lieu of Foreclosure
Definition: an agreement between lender and borrower where borrower conveys all property to lender to satisfy a past due loan to prevent foreclosure. In simpler terms, a deed in lieu of foreclosure is when a borrower gives the property back to the lender (voluntarily) instead of having the lender foreclose on the property. This is very similar to a voluntary repossession in that if you can’t afford your house, you can ask your bank just to take it back and let you walk away.
Short Sale
Definition: Selling your home for a price below the amount owed against it. Simply put, if you owe $150,000 but sell your house for $120,000, you’ve completed a short sale. The problem is, the bank is going to want the $30,000 you owe on that house before they’ll let you hand over the deed to the purchaser. Thus, the borrower and lender have to mutually agree to a short sale and an amount at which the bank will accept offers on the sale. Similarly, for a short sale to make sense for you as a borrower, the bank has to agree to “let you off the hook” for the amount lost. This is referred to as “without recourse.” Those are critical words if you are considering a short sale.
Other Options
You’ll find several other avenues you should consider if foreclosure seems imminent.
- Call the mortgage company and ask for a “forbearance” or other program to provide some temporary relief.
- If you aren’t upside down and your house is really more than you can afford, find an awesome realtor and offer a nice bonus if he/she can close the sale of your house within __ days/weeks/months. Just because you can’t afford the payments doesn’t mean your house isn’t a good buy for someone else.
- Solve the math and behavior problem – LIVE ON A BUDGET!
- Live like no one else. Did you read last week’s article on living debt free? Many of the people who wrote those tips have zero debt, or are on their way. Learn from their wisdom.
- Ask for help. Can I be of assistance? Contact me if you have a specific question and I’ll try to help.
We recently paid off our house but would like to move into the country. What would you suggest for a way to save up money for our home in the country? Are there any safe ways to invest the extra money we have each month now that our house is paid for in order to save up for our home in the country which seems to cost more than what we can afford right now?
Be patient! There are some ways to get rich quick but they usually fail and you lose it all. Bad plan. Depending on how long you expect to save, I would either put the money in a money market account which will do a bit better than an average savings account or, if you can wait at least 5 years, I’d look at some growth stock mutual funds (outside an IRA or other long term investment vehicle that locks you in).
Nowadays many banks will just ignore non-payment for a long period of time. They’re too busy with everyone else who’s not paying – not sure how they survive. After a few bad months they’ll stop accepting payment . . .open a new bank account and dump your payments in there . . . eventually someone will be willing to talk to you about working something out- but you will still have to repay all the payments you missed either in a lump sum or over time. So best to have that money to available to negotiate with.
That said, if you truly can’t afford your house sell it and move on – don’t let a past mistake make your forever misery . . . if you’re screwing up payments because you can’t say no to yourself about things, then grow up, live within your means and NEVER GET INTO THIS MESS AGAIN