Options for Homeowners Who Can’t Make the Mortgage

by Guest Contributor on March 12, 2010

In an earlier post I addressed the moral obligations of making your mortgage payments and not walking away from a home when you can afford the monthly payments. But, I also mentioned that there are people out there who really can’t afford their payments.

There are many homeowners out there who want to stay in their homes, can’t afford the mortgage and don’t know where to turn. While there’s no guarantee of a mortgage modification, there are options out there that many struggling homeowners aren’t aware of.

Housing counseling

Homeowners who can’t make their mortgage payment have options. The first person they should seek out is a housing counselor. The U.S. Department of Housing and Urban Development has a list of certified housing counselors in every state. These counselors are trained to help homeowners assess their financial situation and explore every option available to help them stay in their home, including working directly with your lender. Plus, the counseling is free.

Government programs are available

There are federal programs to help some homeowners. The most known program is the Making Home Affordable Program, which aims to assist homeowners through refinancing or a mortgage modification. One important benefit of the Making Home Affordable Program is that borrowers do not have to be delinquent on their mortgage to get help. In fact, to get a refinance the borrower cannot be delinquent.

Loans held by Fannie Mae or Freddie Mac may be eligible for refinancing. Other loan servicers may also participate in this program. A list of participating loan servicers can be found on the program’s web site.

If refinancing isn’t an option, there is also the option of a mortgage modification under the Making Home Affordable Program. The modification options may include the lender lowering the borrower’s interest rate, extending the term of the loan to up to 40 years or deferring the principal of loan.

It is important to note that accepting a mortgage modification could have a negative impact on your FICO credit score and you could end up with a balloon payment due at some point.

In addition to the federal program, some states have programs available to help homeowners who are facing foreclosure. Housing counselors in your state should be aware of these programs.

Work directly with your lender

Just because your loan isn’t held by a service provider that is working with the federal program, that doesn’t mean you don’t have options. You can call your lender’s loss mitigation department on your own; however, working with your lender through their loss mitigation department can be a difficult and frustrating experience. Housing counselors have experience dealing with lenders and navigating the process to get a mortgage modification.

Some mortgage modification options are similar to the federal program options such as stretching the length of the loan or allowing for a deferment of the principal of the loan. In very limited cases, the lender may be willing to forgive a portion of the loan. However, this isn’t very likely, especially if there isn’t a case of extreme hardship.

Get help now

Mortgage modifications are very complicated. There are many variables that factor into whether or not a borrower can get a modification based on each individual’s situation. The biggest thing I can stress – besides getting help from a HUD-certified housing counselor – is to get help as soon as you realize you may not be able to make your mortgage payment. Don’t wait until you’re behind on your payments to get assistance. And, if you are already behind and haven’t talking to a housing counselor, do so immediately. Working with a professional is the best way to ensure that you’ve explored every option to help you stay in your home.

Links to Resources:

Find out if your home loan is held by Fannie Mae or Freddie Mac

Kristen Doerschner is the public relations coordinator for a non-profit debt relief agency and a freelance writer. Through her writing, Kristen covers a variety of topics, but specializes in issues related to financial education.

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0% APR Balance Transfer Card for 15 Months

by Ryan on March 11, 2010

Are you looking for a 0% balance transfer credit card or a credit card that features 0% APR on purchases? The Citi® Platinum Select® MasterCard® may be the card for you!

Citi just announced they are offering an offer of 0% APR on Purchases and Balance Transfers for up to 15 months on the Citi Platinum Select MasterCard. A 15 month 0% balance transfer offer hasn’t been available from most cardholders for almost 2 years now due to the effects of the economic crisis on the credit industry. But now that the dust is settling on the Credit CARD Act (big changes went into effect on Feb 22), it looks like some of the credit card companies are getting more competitive with their credit card offers – which means better offers for consumers!

How good an offer is a 15 month 0% balance transfer? The last 15 month 0% balance transfers went off the market in 2008. Since then the majority of balance transfer offers were 6 months, and it was only until the last few months that issuers even offered 9 or 12 month balance transfer offers. I’m not sure how long this one will last, but hopefully it is a sign of good things to come!

15 month 0% APR Balance Transfer Credit Card

Citi® Platinum Select® CardThe Citi Platinum Select MasterCard offers 0% APR on Purchases and Balance Transfers for up to 15 months, with a 3% balance transfer fee. This credit card offer is one of the best cards on the market for people looking to make a balance transfer or avoid paying interest on their credit card for the first 15 months they own the card. A balance transfer is a great way to help people get out of debt and the 0% APR on purchases can help people with cash flow problems get over a difficult period (or help people who simply want to keep their money in the bank earning interest!).

Competition in the credit card marketplace

Discover® More® CardThe Citibank announcement came just a few days after Discover dropped the balance transfer fee on the Discover More Card, which features a 0% balance transfer for up to 12 months, and a 6 month 0% APR introductory rate offer. The transfer fee was recently 5% for 12 months, but is now 4% for 12 months.

There are still some advantages to the Discover More Card – it is a cash back credit card which offers up to 5% cash back in select categories and 1% cash back on everything else, and it offers a $50 bonus when you spend $599 within 6 months of opening your account. The Citi Platinum Select MasterCard does not offer a rewards program at this time.

Which card is better – Discover More Card or Citi Platinum Select? The decision comes down to what you are looking for. The $50 bonus and the cash rewards are nice features for the Discover More Card, but the balance transfer fee of 4% is slightly higher than the Citi Platinum Select MasterCard and the shorter 0% intro leaves something to be desired. It will be tough to match the Citibank offer of 0% APR on Purchases and Balance Transfers for up to 15 months (it is currently the best offer to be found in the industry).

Other great balance transfer credit cards and 0% APR cards

The following credit cards offer either 0% balance transfers or a 0% APR introductory offer on purchases:

With the credit card market opening up and becoming more competitive, it makes sense to get a card that will give you more benefits as a consumer. Find the credit card that meets your needs.

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Should You Walk Away from Your Mortgage?

by Guest Contributor on March 11, 2010

There are many homeowners who have found themselves in the unfortunate position of being underwater on their home. Some of these homeowners live in a neighborhood where home values have declined, and others took out too much in home equity loans. In some cases both happened.

While it’s understandable that these homeowners are frustrated, some have decided to simply walk away from their homes, even though they can afford to make their monthly mortgage payments. This is known as strategic default. There are numerous problems with the decision to walk away from one’s home when the borrower has the ability to pay.

Is walking away from your mortgage moral?

First, there is a moral aspect to the decision. You signed a contract and agreed to pay a monthly price for your home. Unless the contract had a stipulation that you can walk if your home’s value falls – and I’m not aware of a single mortgage contract like that – you are not fulfilling your obligation. Some will argue that it’s a business decision, but I think it’s more than that. After all, would a homeowner whose home appreciated in value call it a “business decision” if the bank decided to increase their mortgage payment as the home’s value rose? I seriously doubt it.

I believe we are all obligated to honor our contracts unless there are extenuating circumstances which prevent us from doing so.

I want to be very clear that when I talk about the moral aspects of walking away from a home, I’m talking about people who can afford their payments. I know first-hand that there are people out there who really cannot afford to make their payments and want desperately to stay in their homes. Those people may not have a choice when it comes to giving up their home.

Who does walking away hurt?

In essence, walking away hurts the homeowner who is walking and every other homeowner out there. As homes are sold as short sales or foreclosures, the values of neighboring properties decline. If homeowners walk away from homes they can afford, it just perpetuates the cycle. The only way neighborhoods are going to recover is for homeowners to hang in there and watch out for one another.

I’m a fairly optimistic person, and I truly believe the tides will change and properties will eventually regain their values. Those who think they’ve lost the equity in their home forever are really creating a self-fulfilling prophecy by contributing to declining property values and adding to the amount of foreclosures and short sale homes that are sitting on the market.

I’ll just rent after I walk

Homeowners who think that they can walk away from their homes, rent for a bit and start over are going to be in for a big surprise.

When someone lets their home go into foreclosure, it harms their credit score and leaves a black mark on their credit report. It’s a black mark that will stay on their credit report for seven years. Many landlords do credit checks on their potential renters. Seeing a foreclosure is likely going to be a red flag to the landlord that you’re not capable, or willing, to make your rent payments on time.

The foreclosure is also going to be a red flag to lenders if the homeowner would like to buy a home or take out any new credit in the next seven years. In addition to the decision of whether or not to give a potential homeowner a mortgage, lenders also base interest rates on the borrower’s credit score. The borrowers with the best credit scores get the best mortgage terms and/or interest rates. A foreclosure is going to put the borrower in a bad position when it comes to getting credit … if they can get credit.

Allowing a home to go into foreclosure clearly isn’t something that should be taken lightly or decided quickly, especially if the homeowner can afford the monthly payments. I would urge people to consider all of the long-term effects of a foreclosure, including their plans for the next seven years, before making a final decision.

Kristen Doerschner is the public relations coordinator for a non-profit debt relief agency and a freelance writer. Through her writing, Kristen covers a variety of topics, but specializes in issues related to financial education.

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Financial Risk Test

by Ryan on March 10, 2010

Are you prepared for the unexpected? What would happen if you lost your job? How long could you meet your expenses? Can you handle major car or home repairs? Have you even considered these scenarios? A financial risk test will help you answer these questions and more.

Why you need to do a financial risk test

In recent articles, we covered creating a net worth statement and a cash flow statement. These are important indicators of financial health, but they don’t give you a complete picture of financial health. They tell you where you are and where you are headed, but they don’t tell you how prepared you are for emergencies. That is why you need to do a financial risk test.

What is a financial risk test?

A financial risk test is one way to analyze your ability to handle financial emergencies. This includes looking at your overall financial situation, cash flow, employment situation, insurance, investments, and other factors that can effect your financial health and readiness.

How to perform a financial risk test

A financial risk test will help you analyze your financial situation and your ability to handle the unexpected. You want to consider everything that may effect your financial health and look at options to mitigate your risk when performing a financial risk analysis (insurance is only one option; more on that in a moment).

Each person will have different factors that effect his/her individual situation. For this exercise I have broken the financial risk test in to several major indicators that should be common to most situations: cash flow, employment, insurance, investments, and estate planning. Your situation may vary depending on your specific situation, so take some time to consider all factors that could effect your financial situation and plan accordingly.

Cash flow risk analysis

The first step is to create your net worth and cash flow statements as referenced in earlier articles. We will use the information in these statements to determine your cash flow risk. You will also want to pay special attention to your emergency fund which will help you answer these questions.

Ask yourself these and similar questions based on your specific situation:

  • Can I handle a $1,000 emergency? (car or home repair, airline ticket to visit family, etc.)
  • Can I handle a $5,000 emergency?
  • How many months of current living expenses can I maintain if I lose my job?

Your answer to these questions will determine your next actions. If you can handle a $1,000 emergency, but not a $5,000 emergency, then you may decide to increase the size of your emergency fund.

Employment risk analysis

The last few years have taught us that there are few permanent jobs left in the U.S. Short of a government job or a tenured position, most people face some risk of losing their job.

Questions to ask yourself:

  • How secure is my job?
  • How likely am I to be laid off in the next few weeks, months, or year?
  • What is the general outlook for my company? Industry?
  • What about the local or national economy?
  • Can I claim unemployment benefits if I lose my job?
  • How long will it take to find a new job?
  • Will I be able to to find a job with a comparable salary or will I need to take a pay cut?

Many of these factors are out of your control, but that doesn’t mean you cannot prepare for them. It is always a good idea to have a current resume and maintain your professional network. It also never hurts to work on new skills or obtain licenses or certifications in your field. Not only can they make your resume more attractive, but they may net you a raise as well.

Investment risk analysis

Analyzing investment risk is a broad topic with entire books and websites devoted to determining investment risk, asset allocation, diversification, etc. For this exercise we are looking at investment risk from a 30,000 feet view. Before we start looking at your investments from the perspective of a financial risk analysis, you will want to know how much you have invested, your asset allocation, and a clear idea of your investment goals. A good tool to help with this exercise is the X-Ray tool form Morningstar.com (you can register for a free account or a free trial to Morningstar premium if you are not already a member).

Questions to ask yourself:

  • Do my investments meet my desired asset allocation?
  • Is my asset allocation appropriate to my investment goal(s)? My age?
  • Am I on track for retirement?
  • Will I be able to retire if my portfolio drops 10% in value? 20%? 30%?

The best actions to take will vary depending on your answers to these questions.

Are you properly insured?

Insurance is another broad topic. For our purposes we want to see if you have not only adequate insurance, but the right types of insurance and the right coverage amounts. Again, your specific needs will vary. If in doubt, visit with an insurance specialist or financial planner who can help you with your situation.

Ask yourself:

  • Do you have enough and the right kind car insurance?
  • Do you have sufficient homeowner’s or renter’s insurance?
  • Do you need general liability coverage?
  • How much life insurance do you need?
  • Should you buy term or whole life insurance?
  • Do you need long term car insurance?
  • Do you have the right health insurance for your needs?
  • Do you need mortgage protection life insurance?
  • Should you get pet insurance?
  • Do you need umbrella overage?

You may find that you need to purchase more insurance, or you may find that your current level of insurance is more than adequate. Some people may even elect to self-insure to avoid paying insurance premiums at all.

Are you prepared for the death of a loved one?

This is the most difficult question to face, and there is no easy way to deal with the thought of a loved on passing on. But it is essential to prepare for the inevitable. One of the best ways to prepare is with an estate plan, which is an important and often overlooked part of financial planning. But it also helps to have a financial continuation plan and/or a list of instructions for carrying on your financial situation, business, or other asset.

Ask yourself:

I recommend that everyone accomplish each of the items on this list. You can create a simple will for a few dollars through many online forms, or you can use a lawyer for a more complete estate plan. Your needs will vary.

Where to go from here

Performing a financial risk analysis forces you to ask some difficult questions and prepare for some even more unpleasant outcomes. No one wants to think about financial emergencies, losing his job, or death. But all of these events are not only possible, but probable at some point in your life.

Hopefully you will take the time to thoroughly complete this financial risk test. You will probably come up with some ideas that will better help you prepare for the unexpected, reduce your overall risk, and make improvements to your financial plan.

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How to Create a Personal Cash Flow Statement

by Ryan on March 9, 2010

There are many ways to measure your financial health. The measurement that probably gets the most attention from personal finance books and news outlets is the personal balance sheet, or net worth statement. Knowing your net worth can be important, but keep in mind that it is a snapshot in time and not necessarily a true indicator of financial health. There are many other factors that affect your financial health, one of which is your cash flow statement, which is a representation of your net monthly cash flow.

You can use your cash flow statement in conjunction with your net worth statement to get a better idea of your overall financial health. Later we will show you how to combine your net worth statement and cash flow statement with a financial risk test and debt analysis which will help you get a more clear picture of your financial health.

Why positive cash flow is important

One of the fundamental building blocks of becoming wealthy is spending less than you earn. It is one of the core concepts of becoming a millionaire. Your cash flow statement won’t tell you if you will become a millionaire or not, but it can tell you if you are on the right path – hint: you can’t build wealth if you are running on a deficit.

How to Create a Personal Cash Flow Statement

Creating a cash flow statement may remind you of creating a budget. You will need to record all sources of income and all your expenses. Then you will add the final amounts for income and expenses. Just like your net worth statement, a positive number is positive cash flow (good!) and a negative number is negative cash flow (bad!).

Factors to Consider in Personal Cash Flow Statement

A cash flow statement is designed to list all sources of income that affect your cash flow, not just your salary from your day job. Below this section is a list of income streams to consider adding to your cash flow statement. However, you should only add the income sources that are available for spending. For example, investment income and dividends are listed as forms of income, but you wouldn’t list those on your cash flow statement if they are in retirement accounts or are automatically reinvested.

On the same token, you need to record all expenses, including regular and irregular expenses. For example, some of your expenses may come quarterly, semi-annually, or annually. You may wish to break those down into a monthly approximation (examples could include insurance premiums, taxes, homeowner’s association fees, investment contributions, etc.). Groceries and utilities are also expenses that can be approximated to smooth out your cash flow statement.

The following is a list of income sources and expenses that you may wish to include in your personal cash flow statement. You will need to tailor it to your needs.

Income

Earned Income

  • Salary 1
  • Salary 2
  • Bonuses/tips/commissions

Other Income

  • Self-employment income
  • Freelance/consulting income
  • Government benefits (unemployment, disability, VA benefits, welfare, etc.).
  • Child support/alimony
  • Investment Income
  • Interest income
  • Dividends
  • Capital gains
  • Distributions

Retirement Income

  • Pension
  • Social security
  • Annuity
  • Retirement plan distributions (401K, IRA, withdrawals)

Expenses

Fixed Expenses:

  • Mortgage/Rent
  • Car payments
  • Insurance premiums
  • Property Taxes
  • Alimony/Child Support
  • Investment contributions

Variable expenses:

  • Groceries
  • Utilities
  • Medical care
  • Entertainment/hobbies
  • Dining out
  • Maintenance/home or auto
  • Spending money
  • Other

Calculate the Net Cash Flow

Add total income and expenses and you have a personal cash flow statement. If your cash flow statement is positive, then you have some additional cash each month that you can use to help you reach your financial goals (build emergency fund, pay down debt, invest, etc.). If your cash flow statement is negative, then it is time to look for ways to right the ship and turn things around. Look for areas you can trim back on expenses, and ways to increase income.

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