This article is for educational purposes only. The writer is neither a lawyer, tax professional or realtor. For legal advice please see your attorney. For tax advice please see your tax professional and for real estate advice please see your realtor.
When should you stay in your home?
You should stay in your home when you have a temporary setback, but otherwise can still afford to make your monthly payment. The temporary setback should also be a hardship condition. A condition that caused you to fall behind in making your monthly payments that you could NOT control.
For example, the lender would consider it to be a hardship condition for someone who had a heart attack, and may have loss pay because they were unable to work. On the other hand, they may not be sympathetic to someone who purchased rental real estate thinking rents would increase and prices fell, instead.
Does this mean for certain that your lender will allow you to stay in your home, if you can afford your monthly payments and because you had a financial hardship?
As a practical matter, yes, but not necessarily.
Your lender does not have to let you stay in your home! And you need to understand that they are going to make you jump through a financial hoop or two before they decide to let you. The bank wants to know that you have a monthly positive cash flow after all your expenses, including your house payment.
They are going to look at your current financial condition closely. Request a complete financial disclosure. Essentially requalify you for the loan. Have you complete more documents again. You know the drill?
As long as you can convince them with your documents that you can afford your monthly payment, you should be just fine and able to stay in your home. To those of you in the no doc crowd, be careful.
Let me say it in the converse, you may not be able to stay in your home if you are unwilling or unable to verify that you have the financial capacity to afford your monthly payment. The key word is verify.
Apart from what the lender thinks and wants, there are several matters you may want to think about before speaking to your lender. What are they?
To begin with, just because the lender will let you stay in your house does not mean that it is in your long-term best interest to do so.
Here is where things starts to get tricky.
Consider this: have you been honest about your financial situation? Most of us are blind to what we cannot see.
Can your really afford your current monthly payment? Do you have your spending habits under control? Is it clear to you that although some people know “to the last quarter” how much money they spend–that most of us–or certainly many of us, do not have a clue?
Another question, even if you have been honest and accurate about your spending habits: How much of a monthly positive cash flow do you really have?
This is important because, let’s say you have $10,000 cash in the bank now, a small monthly positive cash flow after all expenses, and you have a monthly mortgage payment of say, $3500 or more–as many people will have who live in my home state–California.
Let’s say too that you are behind in your payments–your lender gives you a workout agreement–and you pay your mortgage for four or five months, and then run into a financial hardship that cannot be reversed. And one other thing, let’s say that $10,000 is all the savings you have.
Does this example make it clear to you that your decision to remain in the house may make it difficult for you to move on–if you are forced to several months later–because you no longer have the $10,000 cash, when you need it?
Another group of questions you may need to think about are, has your adjustable rate mortgage already adjusted upward? How soon will your rate adjust upward? How much more money is your rate increase going to cost you?
What does your financial picture look like when you have a rate increase? Can you still afford the house after a rate increase? And do you still have a reasonably comfortable margin of error after a rate increase?
If not, this brings you to the ultimate and what I think is the most difficult question for most us to face and answer. Even if the lender allows it:
Can you REALLY afford to stay in your home?
None of this is meant to frighten you. I am certain you will make the right decision for you and your family!
But many of you will most certainly need to think about and find answers to some of these questions and more. And you will want to be prepared in advance–BEFORE speaking to and sharing documents with your lender. You will still want to be truthful, but….
In summary, you should stay in your home when you have a temporary setback due to a financial hardship over which you had no control, and where you can still afford to make your monthly payments. You will also want to take into consideration the fact that eventually most loan modifications fail because the payment is more than the homeowner can actually afford.
Tags: Foreclosure, foreclosure prevention, home loss, preforeclosure, save your home
