So, how is it that after all the hard work, planning, and saving it takes to buy a house, some people end up losing their homes to foreclosure? Is it carelessness or a lack of discipline with their finances? While these things would almost certainly contribute to financial disaster for a homeowner, the truth is that these are not the only, or even the most common, reasons for delinquency and foreclosure.
Reduction in Income, Illness, or Death
As it turns out, job loss, followed by illness or death in the family, are the top two reasons homeowners find themselves unable to pay their mortgages. In fact, more than 60% of delinquent borrowers surveyed in a 2006 Freddie Mac survey cited one of these two reasons for their difficulty. Let’s think about this for a minute. That means that any one of us, despite our best intentions, could be at risk for serious financial hardship if we don’t plan ahead. Life is full of surprises; and because you can’t always predict what life will bring, it’s critical that you prepare a safety net to protect yourself from life’s occasional turbulence.
Overspending
The third most common reason for default is excessive obligation, which could include overspending. This is one of the hardest financial lessons to learn, especially as it relates to overusing credit. As a homeowner, you will have many important financial obligations. At the same time, you will be bombarded with many unsolicited offers of credit. If you take advantage of these credit offers without adhering to your spending plan, you could get into serious financial trouble. Eventually you will have to pay the money back plus all of the finance charges and maybe even some expensive fees. Worse yet, you could face unexpected expenses related to repairing a car, fixing a leaky roof, or going to the hospital. Suddenly you could be thrown into deep financial trouble.
Sudden Increase in Expenses
Another situation that can lead to excessive obligation is a large increase in expenses without the benefit of a comparable increase in salary. This can be the case with some consumers who have adjustable rate mortgages (ARMs) or interest-only mortgages. Consumers initially find these options attractive because they make it possible to purchase a home with lower, more affordable monthly payments. Unfortunately, when the mortgage payments adjust according to the terms of the loan, some consumers aren’t actually prepared or equipped to handle the significant increase in payment. Unless you act fast to change your situation, you could find yourself in deep financial trouble.
Warning Signs of Excessive Obligation
- You don’t have any savings
- Your credit card balances are rising every month
- You only make minimum payments on your credit cards
- You're juggling bills and don’t know which one is most important to pay
- You write a check on one credit card to pay another credit card
- You have more credit cards than can fit in your wallet
- You are at the limit of most of your credit cards
- You don’t know how much you owe
- You are receiving phone calls or letters about delinquent payments
- You are dipping into your retirement account to pay your monthly bills
- You are hiding your debts and credit card purchases from your spouse or partner
- You always have to “moonlight” or take extra jobs to make ends meet
- You are hoping to catch up on all your debts when you “win the lottery”
If these warning signs are familiar to you, get help now, while there’s still time.
