Strategies to Avoid a Foreclosure
Common wisdom holds that homeowners should have at least four months of living expenses saved up to weather tough times. This can be a challenge for many of us to achieve. There are household repairs to do, children and pets to care for, vehicles, utilities and numerous other daily expenses to cover. Our consumer society also puts an emphasis on buying non-essentials driving many people into credit card debt even when they have regular, full-time employment. When savings are minimal in the best of times, the sudden loss of income can be devastating.
Creating a household budget is a great way to gauge your short and long-term financial health and becomes essential when there is a reduction in income. Write down all your household expenses such as mortgage, telephone, electricity, food, car and home insurance, average monthly clothing costs, medications, etc. (The Canadian Mortgage and Housing Corporation provide a good template.) Now take a second look at your list. Can you reduce your spending on any items? For example, many families can reduce expenses by eliminating a cell phone, cancelling health club memberships, parking the car in the garage for a few months to reduce insurance costs, and eliminating entertainment costs (e.g., cable television, movies, restaurant meals). If you are carrying debt on credit cards, consolidate it into a line of credit or a loan with lower interest.
On the other side of the sheet, note your household income. If it is not adequate to cover all the expenses, you need to take action quickly. The first step is to earn additional income. As well as employment, consider selling a second car or renting out a room to a visiting student (check with local colleges, universities, and ESL schools). As the members of your family look for additional ways to earn income, keep in mind that in a slow economy this can take time—potentially more time than you can afford. Calculate how many months of living expenses are available without additional income. If you have three months of income or less, this is the time to make some decisions to avoid foreclosure and protect your investment.
Some Canadians will find it tempting to walk away from their home when their down payment and home equity is very low and the market value has fallen below the price paid for the home. This can happen when people buy in an ‘up’ market that quickly turns downward. However, walking away will create a black mark on your credit rating making it very difficult to obtain a mortgage or any other type of credit in the future. As well, rental prices are often as much or more than monthly mortgage payments on a comparable property.
You may be pleasantly surprised to learn that your lender is amendable to finding short-term solutions to your financial crisis. Foreclosure is an expensive undertaking for financial institutions. As well, if a foreclosure takes place when the economy is in a down cycle, the lender may get a lower price for the property than the value of the mortgage. Both parties have an incentive to find solutions. One option is to defer up to four mortgage payments; these payments will be amortized over the remaining mortgage period with interest continuing to accrue. This is a short-term solution, which gives homeowners a reprieve for up to four months.
Another option is to extend the amortization thereby reducing the payment amounts. This solution is certainly preferable to losing your home but note that in the long-run you will pay more in interest charges. Lastly, your lender may also be open to renegotiating the mortgage to reduce the payments, especially if interest rates have fallen recently.
If you find that these solutions are not adequate because of an ongoing lack of income, the only remaining solution is to sell your home. If you act quickly, you may be able to sell while you continue to make mortgage payments. This will allow you to retain any equity you have accumulated and any gain between the initial purchase price and the sale price minus the remaining mortgage amount. Keep your lender informed of your attempts to sell the property as it may delay their decision to foreclose.
If you are not able to sell while you continue to make mortgage payments and your lender is not willing to extend the grace period, your lender may opt to initiate a foreclosure sale. When this happens, you may lose your entire investment.
Understanding the process and your options can help you make the best decisions for your financial well-being.