MSU Extension Foreclosure Education & Counseling

(bright music) - [Presenter] Welcome to this video on determining your financial position. This video is one in a series of educational presentations for Michigan State University Extension about foreclosure. In this video, we will discuss how to determine your financial situation to help you assess where you are now and then what decisions you could consider. Additional videos in this series discuss the foreclosure timeline as well as the options to keep sell or allow the foreclosure to happen. Deciding whether or not to keep your home is something that only you, the homeowner, can determine. The first step in making the decision is a careful review of your budget, income, and expenses. You can likely do this without paying anyone for help. There is help available if you ask. We would tell you what information to gather about your mortgage, then prepare you for the second step, which is making a call to your lender. Your mortgage company will ask you many questions. It is critical that you have a realistic overview of your current financial situation to present to the servicer when asking for a workout. Writing your budget should help you see if any of your spending habits need to be changed, like cutting all unnecessary spending or increasing income to determine what can be promised and realistically done. Let's talk about repairing your workout package before you make this phone call. A budget is simply a list of all your net monthly income after taxes and deductions, as well as all expenses. For housing, include your mortgage payment, property taxes, and homeowners insurance. List what you pay for utilities like electric, natural or propane gas, water, sewer, trash pickup, phones, et cetera. If you pay some of these bills quarterly, divide by it three to get a monthly amount. Next, write down your debts if you have car loans, leases, credit cards, student loans, and personal loans. Then list your household expenses for food, gasoline, car insurance, credit, dental, childcare, home maintenance, et cetera. Several tips are to use a pencil, have a calendar ready, use your checkbook or monthly checking statement for accurate amounts. You'll be asked both your gross and net monthly income allowance. Net income is the amount you take home after taxes. Gross income is your pay before taxes are deducted. If you are paid weekly or biweekly, compute your monthly amounts. Who pays your property taxes and homeowners insurance? If these costs are included in your mortgage payment, in other words are escrowed, then the mortgage company knows they are paid. If you pay your taxes and insurance yourself, then you need to include them in your budget. Next, add all your monthly income and also add your monthly expenses. Subtract your total expenses from your income. Did you end up with a positive or negative balance? The next question is if your mortgage company can help you when your cash flow is negative? If your cash flow is negative, ask yourself some questions. Can you increase your income with a second job? When you review your payroll deductions, can you reduce some to maximize your take home pay? Can any flexible expenses be decreased or eliminated such as cable TV, cell phones, eating out? Could you stop using credit cards? When you are in a temporary crisis situation, analyze what you can do. Talk with your entire household to be sure everyone is on board with the budget. Sit down together to discuss and make decisions on ways to cut expenses and increase income. Now, let's talk debt-to-income ratios. Lenders use the guidelines that no more than 34% of your gross monthly income go for your mortgage payments, taxes and insurance. Here's how to calculate your debt-to-income ratio. First, divide your total household payment including principal, interest, taxes, and insurance by your gross monthly income. Another guideline is that no more than 11% of gross monthly income is paid for other debts including car payments, credit cards, and other loans. Next, add any debts to the ratio. Do this by dividing any secured debts, such as auto loans, student loans, et cetera, and also any unsecured debt from credit cards and or personal loans by gross monthly income. For example, if someone's gross income is 2,500 per month and their house payment is $1,000, their housing ratio is 40%. With the same monthly income of 2,500 and a house payment of $775, the housing ratio is 31%. For a debt of 650 per month, divide 650 by 2,500, that equals 26%. For a debt of 275 per month, divide 275 by 2,500, that equals 11%. The next step is to add your house payment debt to other debt. In our example, the house payment debt of 31% plus other debt of 11% equals 42%. When doing calculations for loan modifications, lenders start by looking at how to reduce the house payment, which again includes the principal, interest, taxes, and insurance to 34% of gross monthly income. First, we'll reduce the interest rate, bring the house payment to 34% of gross monthly income. If not, what if additional years were added to the term? Next, what if some of the principal is deferred? Lastly, what if fees are eliminated? If at any step process, the 34% is indicated, then the lender has found that the homeowner can afford the steps and stops doing any additional computations. Once you do the budget process, ask what you have learned. Is your home affordable? Remember the guidelines of 34% of gross income for housing, including the mortgage payment, property taxes and insurance. Also figure debt ratio, which should be no more than 11% of gross income by lender's standards. Ask yourself what can realistically be done in your situation? Another part of the workout package for your mortgage company is to identify the hardship in your situation. What caused the missed payments? Was it unemployment or reduced pay? Perhaps illness or disability? Sometimes the reason is a relationship changed like divorce or separation. Another possibility with an adjustable mortgage is that the payment increased. Next step is to write a simple, short hardship letter. Explain why it is difficult to make your house payment. Describe your household, including how many people live in a house, how many of your children, their ages, et cetera. Detail the past events that led up to the delinquency on your mortgage. Describe what your current situation is and how you'd like the lender to help you. State that you want to keep your house or you want to sell your house. Explain what you have done to help yourself like analyze your budget, cut expenses, or added income. State that with help, you are sure that you can overcome this situation. Be hopeful and positive. The first part is the budget or financial statement of your monthly income and expenses. Some servicers will allow borrowers to present this information verbally or on a simple sheet of paper. Others have special forms that require borrowers to complete, sign, and date. Second, the servicer will ask of proof of income. This includes two to six months of the most recent income statements like pay stubs, benefit statements for unemployment, social security, et cetera. For every person listed on the mortgage, you also need to provide recent monthly bank statements and your recent year's federal income tax returns. Third is writing a hardship letter. We have been discussing how to prepare for work with your mortgage company. First, gather your information, including your budget, income documents, bank account statements, and write a hardship letter. Next, think through what answers you need from the mortgage company. It is a good idea to write your questions down. Keep a record of all communication, including calls, letters, et cetera between you and your lender, noting dates, times, names, and phone numbers. Purchase a notebook to organize your records. Now, you're ready to make a phone call. Ask to speak to someone in the Loss Mitigation Department and ask for a workout package. A workout package is an agreement between you and your lender that outlines how you will pay your mortgage's default and avoid foreclosure. To negotiate a workout package, know what you need and what you are able to give. Be assertive, but not rude. Quick action is necessary. Foreclosure can happen in four months and a sheriff's sale can happen in five months. For more information on the timeline, listen to the foreclosure process in Michigan video in this series. Do not wait. The sooner you act, usually the more options you have. Call the mortgage company as soon as the budget and hardship letter are complete. Open all your mail. Be proactive. Your lender will mail you a workout package. Fill out the workout form promptly. Keep a copy for your records and send the form back by fax or certified mail. Include your hardship letter. When your lender asks for additional documents, send them promptly. Keep communicating with your lender for best results. If making a call to the servicer creates anxiety for the homeowner, it is important to contact a US Department of Housing and Urban Development certified housing counseling agency, in other words, HUD, and ask for help or visit the HUD counseling website to find a local housing agency. A housing counseling session will create an action plan. An action plan is a strategy for resolving a crisis based on the goals of the homeowner. Our university-backed, unbiased, starting after foreclosure toolkit offers research-based tools and resources to homeowners who have experienced foreclosure. Accessible and easy to read, this toolkit helps Michigan residents understand their situation both emotionally and financially and is offered online for free. For more information and additional resources, visit the mimoneyhealth.org website. You can also find a certified local housing counselor to talk to about your situation and possible assistance. (bright music)