Mortgage default – when someone falls behind on their mortgage payments – is a tough topic to talk about. It can be frustrating, embarrassing and scary. While there are a lot of negative connotations about default, the process is much different than it used to be with many more protections and options for help.
The federal government has laws in place to protect and help homeowners, and at Quicken Loans, we go beyond the minimum requirements to make sure we do everything we can to help our clients through difficult times.
One of the common ways to get help when in default is to apply for a loan modification, which will shorten your rate, lengthen your loan term (so your payments are smaller), defer part of your payment or make your loan easier to pay in some other way.
There are many reasons why someone might need a loan modification, many of them outside of the person’s control. Fortunately, there are also some smart decisions everyone can make to set themselves up for financial success while going through a loan modification and afterward.
The most important thing to do is stick to a budget. Financial advice site NerdWallet offers a list of budgeting and saving tools, and many banking institutions offer their own versions as well. My wife and I use Dave Ramsey’s EveryDollar app and love it.
EveryDollar helps you plan out and then track every dollar (get it?) you make and spend so that you can easily see how much you have and where your money is going. Regardless of your financial situation, a specific, detailed budget is the foundation on which to build your financial future.
Trim the Fat
Much of the time, big expenditures aren’t what pushes you over your budget. It’s the little things that add up day after day, week after week, until you’ve spent hundreds of dollars a month on coffee, eating out, alcohol, etc.
Figure out how much you can actually afford to spend on these things and then stick to that amount. If you end up with extra money at the end of a month, don’t blow it on something fun. Instead, throw it into that emergency savings account. Also, shop around to see what services you can get for more inexpensively – like car and homeowners insurance, for example.
Protect Your Assets
Your home is your greatest asset, so you should budget around your mortgage payment. The easiest way to do this is by setting up autopay with your mortgage company. Set it for right after your receive your first check of the month so you’ll always have the funds available, and you won’t have to worry about remembering to make the payment on time.
We’ve found that many people aren’t sure what to focus on when there are numerous collectors calling daily, and it’s often tempting pay the mortgage last since it’s usually the largest monthly payment. Some homeowners have used their mortgage payment funds to try to get caught up on their other debts and figured they would then have money to get caught up on the mortgage later. Unfortunately, this often doesn’t end up working out, leaving them in a situation that’s worse than the one they were in to begin with.
Another reason to pay your mortgage first is that home loan companies have the least amount of wiggle room due to stringent government regulations. There are many other resources available, like the U.S. Department of Housing and Urban Development’s Hardest Hit Fund.
In terms of the worst case scenario, defaulting on – and possibly losing – your home is always worse than defaulting on credit card or car debt. Again, you can find budgeting tools and tips all over the internet. Dave Ramsey (of the EveryDollar app) offers advice in the “7 Baby Steps to Financial Peace,” where the first step is save $1,000 for emergencies as fast as you can. This is first so that the next unexpected expense you have doesn’t push you further into debt.
The second step is pay off your debt, starting with the lowest balance first. Many people will try to focus on the debt with the highest interest rate, but you should start with the smallest debt so that once you pay it off, you can put the money you were spending on that bill toward your next lowest balance.
Earlier, I explained that setting up autopay for your mortgage will help you stay on budget. Setting up biweekly payments for your mortgage can help you even more in the long run because you have to be a little ahead with your payments in order to set up biweekly payments.
The other benefit of biweekly payments is that over the course of a year, you make 26 half-payments, which is the equivalent of 13 whole payments annually instead of the 12 required payments, so you end up paying off your mortgage faster.
The important thing to focus on is that there are many different ways to get help if you ask for it, such as creating a detailed budget, which will likely help you achieve and maintain financial stability in the long run.
Do you have any questions about loan modifications, budgeting or anything else? Let us know below!
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