The best foreclosure prevention takes place before you purchase a property — whether it be a primary residence or an income property. Proper financial planning, including creating a budget and performing disciplined research, should enter the equation long before escrow even opens.
Many people learned this valuable lesson much too late during the most recent market cycle and bubble burst. They bought more house than they could rightly afford, signed on using questionable financial instruments to pay for it, and as a result faced the possibility — and in many cases the eventuality — of foreclosure.
There are a number of reasons why a property owner could be facing foreclosure. Given the correct set of circumstances, any one of them could lead to financial hardship, causing the owner/borrower to miss making mortgage payments and leading to the lender initiating the foreclosure process.
From the loss of a job or the drain of equity in the property (going negative or “underwater”), to divorce or a major medical crisis, an individual’s or family’s funds can be depleted rather quickly, forcing them to make a choice between which bills to pay and which ones to hold off on. In many situations the ultimate choice comes down to a decision between paying the mortgage, the credit cards, or keeping food on the table. In any case, it’s not an enviable position to be in.
While many of these situations are unforeseeable, the best thing to do with what is many people’s most costly asset is to be proactive and try to prevent the possibility of foreclosure ahead of time.
It may be an old saying, but living within your means is the most prudent way property owners can protect what is in many cases their most expensive asset. Too many property owners went into foreclosure during the last cycle because they treated their home or income property as an ATM, pulling cashing out their equity to buy cars, pay for vacations, buy furniture, renovate their home, or to pay college tuition for their children.
When you’re borrowing hundreds of thousands of dollars to purchase property, you need to make sure the financial numbers add up before you move forward. A proper budget creates a structure that prioritizes your monthly finances so that you spend your money on what is most important. It protects you from wasting your cash on whims and ending up short on the items that are critical, like your monthly mortgage payment.
Financial planners typically recommend a six-month savings cushion, meaning you should be able to continue to make all your financial commitments for six months if your income is completely cut off. That’s a great rule of thumb, but many people find it tough to get there because their monthly income is already stretched to the limit.
Still, if you want to drastically lower the risk of ever defaulting on your mortgage payments or losing your home to foreclosure, it’s critical that you build some savings into your budget. Even if it’s just a few dollars a month, be disciplined about setting aside cash for that rainy-day fund. If you end up saving enough for six months, funnel those monthly savings toward paying down extra principal on your mortgage (assuming your mortgage does not have a pre-payment penalty).
Even the best planning and budgeting can’t always stave off unforeseen circumstances. Whenever a property owner finds him or herself in a position where those circumstances turn to financial hardship, the best thing to do is to call the lender right away. Report the circumstances to the lender (not the company servicing the mortgage since all they are is a debt collector).
Ask the lender what can be done to avoid going into foreclosure. There may be alternatives to foreclosure available that could make a difference in terms of to what extent the owner/borrower’s credit history is affected, if at all.
From a loan modification and principal reduction, to the lender approving a short sale or accepting a deed in lieu of foreclosure, the option chosen can make a difference as to the future availability of credit to the borrower.
Many people are under a false impression that they can save their home and other assets simply by filing for bankruptcy protection. Nothing could be further from the truth.
The bankruptcy laws were not put in place to shield people from anything bad happening to them. To the contrary, one must think long and hard about filing for bankruptcy before hiring a bankruptcy attorney and proceeding with the process. Like a foreclosure, bankruptcy stays with you on your credit report for years to come, so it is not a step to be taken lightly.
Most importantly, bankruptcy does NOT either prevent or avoid foreclosure, it can only delay it…at best. At worst, the foreclosing lender could convince the judge to allow the foreclosure to proceed right away without granting even a temporary stay. In any case, all the defaulting borrower has done is delayed the inevitable.
The biggest lesson to take away from the most recent foreclosure crisis is that many of the foreclosures that took place from 2007 through 2012 could have been prevented with proper financial planning. And the best plan to start with is a proper budget.
There are plenty of budgeting software programs out there for tech savvy consumers to upload to their computers. And for those who aren’t into computer programs, there’s nothing wrong with a legal pad and a pen to start outlining a family budget. Put down your monthly gross income, your monthly expenses, and leave plenty of room for unexpected expenses which will most certainly arise.
It’s never too late to get started!