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Youngandthrifty’s thoughts: With the economy currently in distress, gas prices looming higher and higher, and the real estate market in parts of North America in the absolute pits, buying a home or keeping up with payments on a current home loan can seem like a very daunting task.  In order to prevent something called the “F” word from happening (Foreclosure… no, not the other word- get your mind out of the gutter!).

Tips for staying ahead of home loan debt

Having trouble making regular home loans repayments? Faced with foreclosure, or looking to rebuild your bank balance after losing your home to the banks? There may be options available that could improve your financial predicament.

When a lender takes steps to sell mortgaged properties and claw back financial debt from a borrower, often it is the last resort for the lender. In many cases, there are steps that borrowers can take to keep foreclosure from becoming a reality.

Be aware of your financial situation and risks

Among the common reasons why mortgage holders fail to meet their regular home loan repayments are:

  • A household income drops from two to one
  • A regular income stream is lost due to redundancy or lifestyle changes
  • Poor financial management: having multiple credit card debts; unsuccessfully juggling too many loans (home, car, and personal loan).
  • Not factoring in a buffer of at least 2% into home loan repayments

If any of these situations apply to you, or you identify any issues, you should review your financial situation as soon as possible and consult your mortgage broker or lender.

Options to consider if you’re behind on repayments

  • Take action, today. Generally, it takes far more than falling behind on a couple of home loan repayments for a lender to step in and sell your home. Regardless of the level of difficulty a borrower is facing, it pays to inform your mortgage broker or lender about your financial difficulty as soon as possible. Take action immediately. Your lender will investigate your situation and endeavour to create an ongoing repayment plan for you.
  • Consider selling your property. Selling your property and paying off the debt before things get out of hand is one way of avoiding the pitfalls of a poor credit record.

Recovering from foreclosure: top tips

If your property has already been repossessed and you’re finding it challenging to recover from foreclosure, we have a few tips that could help you cope and rebuild your financial future:

  • Be patient. It will take time to rebuild a clean credit history.
  • Develop a comprehensive budget. Stick to it. A good budget helps you understand the lifestyle you can maintain. Will it be fillet Mignon for dinner – or sausages? Cancel that nightly glass of wine. Eat at home. Prepare meals from scratch. Put dining out on the backburner.
  • Cancel the credit card. Live within your means. Can’t afford it? Don’t buy it.
  • Get a second job. Getting a second job is a practical way to rebuild your finance and cement a savings strategy.

If you are considering revisiting home ownership, be mindful that you will need to save for a significant deposit plus costs. Of course, seek financial advice as to whether you can comfortably manage a home loan, which is a long-term financial commitment.

Readers: What do you think?  Would you sell for a loss on your home if the value of the home at current prices were lower than what you paid for?  Or would you stick to it and hold on, waiting for improvement in prices?  Have you known anyone who ended up having to foreclose?

Article comments

Little House says:

These are good tips, but I think that selling should be a last resort. Some banks will work with a struggling borrower and reduce the payments, especially if it is a second mortgage (which some people took out if they didn’t have the initial 20% deposit on the purchase). Creating a budget and finding ways to bring in a little extra income are also helpful.

young says:

@Little House- I agree too, that’s like selling what is on paper and making it reality. Which can be pretty harsh.

Kyle says:

That is a tough spot to be in. I think in the long run you are way better off doing absolutely everything you can to avoid having to sell at a steep loss (a second job as you pointed out). The financial losses are considerable, but the mental and emotional side of being forced to move out of your own house has to leave a scar as well. This is why many people choose to go with smaller credit union type of institutions, they are known for working with you when times like these arise. Of course, times ‘like these’ can be avoided with proper financial planning.

young says:

@Kyle- Couldn’t have said it better 🙂

MoneyCone says:

Selling incurs a lot of additional fees and costs. That should be the last resort – don’t do it just because the house is under, the market is bound to bounce back.

This isn’t the first time we are seen a boom-bust cycle!

young says:

@Money Cone-I completely agree with you. That’s like selling at a huge loss, like in the stock market. I’m of the mentality of buy and hold myself, even if its for a house. One of my friends bought a house back in 2000 for $500,000. Then three years later it was worth $250,000. Their next door neighbour sold at that price. Some else moved in, and now houses in that area in 2011 are going for over 1,000,000. So their ex-neighbours must be kicking themselves right now! But yes, boom bust cycles are fine, as long as you have the guts to ride it out! 🙂 (because there’s gonna be a bust soon)

On paper the banks will work with the borrowers if they fall behind, but really, what we have seen is that they won’t or they play the paper game with you until they can legally have you out of the home. People have been foreclosed on while waiting for mortgage modifications. BUT borrowers also have to be responsible and try every way possible to salvage the debt without just walking away.

Ravi Gupta says:

I think you have some great tips. What my parents did before buying a house was living with one of my uncles until they had about 50% of the house value and then decided to purchase the house. They didn’t go for one more expensive just because they had a higher down payment rather they went for something that would suit our needs. In the end they were able to pay it off rather quickly and are financially better for it. I’m very weary of debt because of the impact it can have on your life. I feel that if I had any type of debt I would stop eating out, paying for cable, or doing any of the things that cost money. I would try to throw every single penny I possibly could to eliminate that black cloud. Of course that’s just me and how I was raised.

Great article!!

-Ravi G.