Avoiding Foreclosure - Identifying Mortgage Risks

Foreclosure on your home is a nightmare end result that is in everyone's best interest to avoid. Even well intentioned homeowners can fall prey to the nightmare scenario if they are not careful. During the course of a standard 30 year mortgage, homeowners are naturally going to go through some times that are especially challenging. Borrowers are especially vulnerable if they go through more than one challenge at the same time. This can happen more often than many expect since some challenges increase your risk of foreclosure in more than one way. Here is how the nightmare mortgage scenario can play out for the unwary:

• Your ability to pay your current mortgage on time is compromised.
• You no longer qualify for a refinance on acceptable terms.
• You cannot generate enough income from your home.

The bottom line is that if you cannot refinance and you can't sell your home, then you are locked in to your current mortgage. If you also are unable to pay your current mortgage on time, you may be headed towards foreclosure. Too many borrowers have been caught taking on too much mortgage risk unnecessarily while ignoring steps they could take to reduce the risk of foreclosure and other negative outcomes. To protect their financial future, borrowers need to be able to answer the following questions:

• What are the underlying risks that can cause these problems?
• How can all of those bad things happen around the same time?
• How can you reduce your exposure to these risks from the beginning?
• How can you mitigate risk once they begin to occur?

The Underlying Risks

Threats To Your Ability To Pay Your Current Mortgage On Time

A large number of events and conditions can threaten your ability to make on time mortgage payments. Some reduce your income, others increase your expenses while a few like divorce can negatively impact both your income and expenses. They can impact you on a temporary or a permanent basis. Threats that can jeopardize your ability to make mortgage payments on time by reducing your income include:

• job loss
• reduced compensation at your current job
• temporary or permanent disability
• divorce

Threats that can jeopardize your ability to make mortgage payments by increasing your expenses include:

• poor financial management
• accident or illness
• legal fees and judgments
• a balloon payment due on your mortgage
• rising interest rates
• inflation
• divorce

Threats to Qualifying For A Refinance Of Your Mortgage On Acceptable Terms

Many things can threaten your ability to refinance your mortgage on acceptable terms. They can range from items that from a mortgage lender's perspective indicate that you have unacceptable credit, a reduced capacity to pay your mortgage on time, unacceptable challenges with your property or insufficient capital reserves. Even adverse market conditions can jeopardize your ability to refinance. Threats to qualifying for a refinance of your mortgage on acceptable terms include:

• deteriorating credit score and/or credit history
• a high debt-to-income ratio
• recent job loss or gaps in employment
• reduced compensation at your current job
• recent job change including becoming self-employed
• divorce
• not enough equity in your home
• additional liens on the title to your property
• unfinished home improvement projects
• unrepaired damage to your property
• an acceptable mortgage loan program is no longer offered by mortgage lenders
• rising interest rates

Threats To Generating Enough Income Through Your Home

When trying to proactively head off the threat of an imminent foreclosure generating income from your property by selling or renting your home is often a last resort. However, several factors can impair your ability to do that. Some threats, like national or local market conditions, may be outside of your control. Some factors may prevent you from selling your home for an acceptable price while others may prevent you from generating sufficient income by renting all or a portion of your home. Threats to generating enough income through your home include:

• declining home prices
• declining rental demand
• adverse conditions in your local community
• adverse conditions in the financial markets
• you are underwater on your mortgage - you have negative equity
• your mortgage lender is unwilling to approve a short sale in a timely fashion

The long list of mortgage related risks can be intimidating. However, buying a home well within your reach and making conservative, well-educated decisions regarding your mortgage and your finances, can dramatically reduce your exposure to mortgage risk and help you towards realizing your goals.