Uncategorized August 18, 2014

Navigating Job Loss and your Mortgage

Question: My spouse recently lost his job and although we are fine for the next 60 days in terms of covering our mortgage our fear is that he will not be employed quickly and we will not be able to sustain our mortgage payments.  What are your suggestions to help avoid foreclosure?

Answer:  Sorry to hear of your spouse’s misfortune.  Even though the job market continues to show gradual improvement, there is still substantial labor turnover as businesses evolve and compete.  Hopefully a comparable job will become available and hardship can be avoided.

But, in the meantime action is required to mitigate damage to your family finances and your mortgage holder.  DO NOT go “ostrich”.  Sticking your head in the sand and ignoring the problem will only make things worse.  Your bank does not want to foreclose…they want to get paid.  If you work with them on a solution to the problem, they will work with you.  And there are many solutions; we just need decide what is right for you and your family.   

One solution is to sell your home.  But if you purchased your home with a small down payment in the last eight years or so, you may very well be “underwater” on your mortgage.  Meaning if you sold your home today there would not be enough funds to pay closing costs, (approximately 10% of the sales price) and the entire balance on the mortgage.  So selling your home without significant consequences is not an option.

So you lost your job and you cannot sell your home to pay off the loan to avoid foreclosure.  So what do you do?  You call your lender and tell them of your plight and future prospects.  They will want to work something out, if at all possible.  But you must be honest with them and be prepared to go through a lengthy process proving your hardship.

If you spouse is able to find similar employment again a “Forbearance Agreement” is an excellent solution.  The lender allows the borrower to miss a few payments.  No debt is waived; there will be a repayment plan or the balance added on the end of the loan.  But it does buy the homeowner some time to get finances in order and does not significantly affect your credit.

Another possible solution is a “Loan Modification” program.  If your monthly income is reduced because of the new job, (or expenses increased due to unforeseen events), modifying our current loan by lowering your interest rate is great solution.  If your current interest rate is 6% on a $200,000 note, you are paying $12,000 annually in interest.  Reduce you interest rate to 3% and your interest payment is cut in half to $6,000.  That is a $500 a month is savings.  Lenders rarely reduce principal to make payment affordable.

The two examples above are “short or medium term hardships” solutions.  If your hardship is long-term, i.e. medical issues, marital problems, long term unemployment, job transfer, etc…then you may need to relinquish ownership of your home.  If this is the case, there are solutions also. Some good, and some not so good, but you certainly can avoid foreclosure…if you do not go “ostrich”!