Last night, as I was sitting through another show my wife had on the DVR, my mind started going on about what information that I wanted to get out to people this month. The program we were watching was called “Suits” on the USA Network. It’s a show about a guy named Mike who had a childhood dream of becoming an attorney that was derailed after he was caught selling a math exam to the Dean’s daughter. The premise is that he gets hired at a big law firm even though he faked his bar exam due to his natural intelligence and eidetic memory.
What made me think of this month’s topic was that during the “hardball” he was playing with a banking firm he stated, “after all, you’re the ones that got us into this economic mess in the first place.” Even though I’m a broker within the banking industry and not an actual banker, it really reminded me of the scrutiny that the mortgage industry has been under and the blame that has been assigned for the housing crisis and rise in foreclosures.
Let me start with saying that there were certainly a lot of bad decisions combined with unscrupulous bankers and brokers, both in the financial and mortgage industries, which had a lot to do with the problems we now face with foreclosures. However, the main reasons for foreclosures have remained the same through the years and have only been magnified by the current economy. Here are some of the common causes and information on how you can prevent yourself from falling victim.
- Unemployment – It’s pretty obvious that this is a huge factor in foreclosure. Whether you have been working at the same places for decades or just a few short months, globalization and a down economy are going to affect you. Living within your means and creating an emergency fund are the keys to avoiding this. The standard was always 3 months of monthly expenses for wage earners and 6 months for self employed people. I recommend 6 and 9 respectively, especially to protect you from recessions of this magnitude.
- Illness – short term illness and disability are the most common causes for income to stop for a family. This is almost always something unforeseen that people ignore until it lands on their door step. Every mortgage client I meet with is advised to make sure that they have a disability insurance policy that will create enough of a payment stream to cover their portion of household expenses if they get sick, even if that means scaling down the size of the house you are looking to buy in order to afford the insurance policy.
- Death – if you have a dual person income and your bills are based on that income and one person passes away, whether it’s expected or not, it’s going to have an effect on you being able to make ends meet. Having proper life insurance is the key for anyone in this situation. Depending on the professional you speak with, you will get varying information on how much you can carry but in order to avoid foreclosure the absolute minimum you should have should cover funeral expenses and the pay off of your mortgage. I would recommend enough to give your partner a clean financial slate plus enough for an emergency fund. In terms of affordability, I don’t think you can afford not to have life insurance. Determine what the payments are going to be and scale down your other monthly expenses and/or buy a smaller house to make sure that your assets are protected long term for your family.
- Divorce – more people get divorced than stay married. When all of your finances are based on two incomes and now one person‘s income is no longer there, you are going to face financial hardship. I can’t give any financial advice to help you solve this one. All I can say is work harder to communicate and get some counseling. The grass isn’t greener and it’s always cheaper to keep her. Or him. Just making sure you’re still reading.
Other problems are balloon payments, major home repairs, predatory lending, credit card debt and financial irresponsibility. Most of these problems can be avoided by following the advice in the four main causes.
Want to make sure you are putting your family in the best position? Give us a call for a no cost review of where you are with your mortgage (or ability to get one) and your monthly cash flow. We do not sell any insurances or securities, however, we work with several financial services professionals and can help put you in touch with someone to help you achieve, and maintain, your financial dreams.