Coping With a Real-estate Slow Down

Reviewed Mar 20, 2017

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Summary

  • A real estate slump won’t hurt you unless you need to sell.
  • Call your lender after one or two missed mortgage payments.

Do declining home prices have you worried? If you’re able to make your mortgage payments and are planning to stay where you are for at least a few years, relax. A real estate slump, such as a slowdown in sales and softening of prices, won’t hurt you unless you need to sell.

For some homeowners, however, decreasing home prices can add to an already long list of financial woes. It’s bad enough if you’re having trouble making your monthly payments on a first and/or second mortgage. You may also be facing a sharp rise in those payments soon when your adjustable-rate loan is adjusted upward. If you have an “interest-only” loan, you may be reaching the point where you start having to pay principal (and the interest rate could be going up at the same time).

Don’t count on a short slump with a quick recovery that allows you to sell your home for a gain. Like the stock market, real estate goes through ups and downs, but its cycles can be much longer. Down markets can last for several years. Price drops also can speed up as more homeowners rush to sell and more homes go into foreclosure, throwing more homes on the market at a time of weak demand.

Stay out of trouble

The best way to ride out a real estate slump is to travel light, debt-wise. This takes foresight, discipline, and the ability to resist temptation. Ideally, your principal and interest payments should be no larger than 20 percent of your total income if you want to be slump-safe, says Doug Charney, an investment advisor and financial planner in Harrisburg, Pennsylvania. That’s for the highest payments you would face over the life of the loan. For a fixed-rate mortgage, this is the initial payment and every payment thereafter. For an ARM, it’s the maximum you would pay once the loan fully adjusts to market interest rates.

In any event, Charney says, you’re asking for trouble if you have to stretch. “If you’re trying hard to qualify for the mortgage, you’d better back off,” he says.

As for existing loans, you can cut your risk by shifting from an ARM to a fixed-rate. Certain ARMs are extra risky:

  • The interest-only loan delays the date when you start having to pay principal. At that point, you can expect a steep hike in monthly payments.
  • The option ARM loan allows you to pay even less than the monthly interest, at least at first. But you increase your principal by doing this, and you still have to pay it all back eventually.

Avoid foreclosure

With a low-risk loan and a stable income, you are in good shape to hold on to a home through even a multi-year slump. But what if you are already struggling to make payments? Your options are more limited then. But there are ways to avoid foreclosure—the forced sale and loss of your home.

First and foremost, say experts, you need to call your lender before the trouble snowballs. The longer you wait to contact your mortgage company, the greater your chance of losing your home.

If the problem is addressed early, a bank or mortgage company might offer one of several options for modifying the loan or allowing you temporarily to pay less than the normal monthly payment (the term for this is forbearance). You should also contact a nonprofit housing or credit-counseling agency for help and advice (see the resources below).

If you can’t make loan payments even with an adjusted plan, you can still avoid foreclosure through one of three steps:

  • In an assumption, a qualified buyer takes over your mortgage debt and makes the payments.
  • In a short sale, the lender might agree to let you sell the home and accept the proceeds even if they are not enough to cover the full mortgage amount.
  • The lender agrees to a deed-in-lieu instead of a true foreclosure. Through this action, you voluntarily transfer title of the property to the lender in return for cancellation of your mortgage debt.

Beware of mortgage scams

Homeowners who do not pay their mortgage are often targeted by criminals who try to con them in a number of ways. The U.S. Department of Housing and Urban Development (HUD) warns against two schemes in particular:

  1. In “equity skimming,” someone posing as a buyer offers to get you out of trouble by taking the deed to your property and promising to pay off your mortgage or give you cash when the property is sold. The “buyer” might also suggest that you move out, after which he collects rent for a while and then skips out. You are left liable for the mortgage even though you have given up the deed.
  2. Phony counseling agencies that offer services for a fee. These are typically things you can do yourself for free, such as working out a new payment plan with your lender.

Before you pay anything, HUD suggests calling one of its approved counseling agencies (see “Resources” below).

Resources

U.S. Department of Housing and Urban Development
For a list of approved counseling agencies go to
www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
800-569-4287 (TDD 800-877-8339)
“Avoiding Foreclosure”: www.hud.gov/foreclosure/index.cfm

HOPE NOW, an alliance of lenders, counselors and other mortgage market participants, provides a hotline called Homeowners HOPE™ at 888-995-4673. It is staffed by HUD-approved credit counselors who can help you explore possible options, www.hopenow.com.

By Tom Gray
Source: Doug Charney, senior vice president, Charney Investment Group, Harrisburg, PA; Freddie Mac, U.S. Department of Housing and Urban Development.

Summary

  • A real estate slump won’t hurt you unless you need to sell.
  • Call your lender after one or two missed mortgage payments.

Do declining home prices have you worried? If you’re able to make your mortgage payments and are planning to stay where you are for at least a few years, relax. A real estate slump, such as a slowdown in sales and softening of prices, won’t hurt you unless you need to sell.

For some homeowners, however, decreasing home prices can add to an already long list of financial woes. It’s bad enough if you’re having trouble making your monthly payments on a first and/or second mortgage. You may also be facing a sharp rise in those payments soon when your adjustable-rate loan is adjusted upward. If you have an “interest-only” loan, you may be reaching the point where you start having to pay principal (and the interest rate could be going up at the same time).

Don’t count on a short slump with a quick recovery that allows you to sell your home for a gain. Like the stock market, real estate goes through ups and downs, but its cycles can be much longer. Down markets can last for several years. Price drops also can speed up as more homeowners rush to sell and more homes go into foreclosure, throwing more homes on the market at a time of weak demand.

Stay out of trouble

The best way to ride out a real estate slump is to travel light, debt-wise. This takes foresight, discipline, and the ability to resist temptation. Ideally, your principal and interest payments should be no larger than 20 percent of your total income if you want to be slump-safe, says Doug Charney, an investment advisor and financial planner in Harrisburg, Pennsylvania. That’s for the highest payments you would face over the life of the loan. For a fixed-rate mortgage, this is the initial payment and every payment thereafter. For an ARM, it’s the maximum you would pay once the loan fully adjusts to market interest rates.

In any event, Charney says, you’re asking for trouble if you have to stretch. “If you’re trying hard to qualify for the mortgage, you’d better back off,” he says.

As for existing loans, you can cut your risk by shifting from an ARM to a fixed-rate. Certain ARMs are extra risky:

  • The interest-only loan delays the date when you start having to pay principal. At that point, you can expect a steep hike in monthly payments.
  • The option ARM loan allows you to pay even less than the monthly interest, at least at first. But you increase your principal by doing this, and you still have to pay it all back eventually.

Avoid foreclosure

With a low-risk loan and a stable income, you are in good shape to hold on to a home through even a multi-year slump. But what if you are already struggling to make payments? Your options are more limited then. But there are ways to avoid foreclosure—the forced sale and loss of your home.

First and foremost, say experts, you need to call your lender before the trouble snowballs. The longer you wait to contact your mortgage company, the greater your chance of losing your home.

If the problem is addressed early, a bank or mortgage company might offer one of several options for modifying the loan or allowing you temporarily to pay less than the normal monthly payment (the term for this is forbearance). You should also contact a nonprofit housing or credit-counseling agency for help and advice (see the resources below).

If you can’t make loan payments even with an adjusted plan, you can still avoid foreclosure through one of three steps:

  • In an assumption, a qualified buyer takes over your mortgage debt and makes the payments.
  • In a short sale, the lender might agree to let you sell the home and accept the proceeds even if they are not enough to cover the full mortgage amount.
  • The lender agrees to a deed-in-lieu instead of a true foreclosure. Through this action, you voluntarily transfer title of the property to the lender in return for cancellation of your mortgage debt.

Beware of mortgage scams

Homeowners who do not pay their mortgage are often targeted by criminals who try to con them in a number of ways. The U.S. Department of Housing and Urban Development (HUD) warns against two schemes in particular:

  1. In “equity skimming,” someone posing as a buyer offers to get you out of trouble by taking the deed to your property and promising to pay off your mortgage or give you cash when the property is sold. The “buyer” might also suggest that you move out, after which he collects rent for a while and then skips out. You are left liable for the mortgage even though you have given up the deed.
  2. Phony counseling agencies that offer services for a fee. These are typically things you can do yourself for free, such as working out a new payment plan with your lender.

Before you pay anything, HUD suggests calling one of its approved counseling agencies (see “Resources” below).

Resources

U.S. Department of Housing and Urban Development
For a list of approved counseling agencies go to
www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
800-569-4287 (TDD 800-877-8339)
“Avoiding Foreclosure”: www.hud.gov/foreclosure/index.cfm

HOPE NOW, an alliance of lenders, counselors and other mortgage market participants, provides a hotline called Homeowners HOPE™ at 888-995-4673. It is staffed by HUD-approved credit counselors who can help you explore possible options, www.hopenow.com.

By Tom Gray
Source: Doug Charney, senior vice president, Charney Investment Group, Harrisburg, PA; Freddie Mac, U.S. Department of Housing and Urban Development.

Summary

  • A real estate slump won’t hurt you unless you need to sell.
  • Call your lender after one or two missed mortgage payments.

Do declining home prices have you worried? If you’re able to make your mortgage payments and are planning to stay where you are for at least a few years, relax. A real estate slump, such as a slowdown in sales and softening of prices, won’t hurt you unless you need to sell.

For some homeowners, however, decreasing home prices can add to an already long list of financial woes. It’s bad enough if you’re having trouble making your monthly payments on a first and/or second mortgage. You may also be facing a sharp rise in those payments soon when your adjustable-rate loan is adjusted upward. If you have an “interest-only” loan, you may be reaching the point where you start having to pay principal (and the interest rate could be going up at the same time).

Don’t count on a short slump with a quick recovery that allows you to sell your home for a gain. Like the stock market, real estate goes through ups and downs, but its cycles can be much longer. Down markets can last for several years. Price drops also can speed up as more homeowners rush to sell and more homes go into foreclosure, throwing more homes on the market at a time of weak demand.

Stay out of trouble

The best way to ride out a real estate slump is to travel light, debt-wise. This takes foresight, discipline, and the ability to resist temptation. Ideally, your principal and interest payments should be no larger than 20 percent of your total income if you want to be slump-safe, says Doug Charney, an investment advisor and financial planner in Harrisburg, Pennsylvania. That’s for the highest payments you would face over the life of the loan. For a fixed-rate mortgage, this is the initial payment and every payment thereafter. For an ARM, it’s the maximum you would pay once the loan fully adjusts to market interest rates.

In any event, Charney says, you’re asking for trouble if you have to stretch. “If you’re trying hard to qualify for the mortgage, you’d better back off,” he says.

As for existing loans, you can cut your risk by shifting from an ARM to a fixed-rate. Certain ARMs are extra risky:

  • The interest-only loan delays the date when you start having to pay principal. At that point, you can expect a steep hike in monthly payments.
  • The option ARM loan allows you to pay even less than the monthly interest, at least at first. But you increase your principal by doing this, and you still have to pay it all back eventually.

Avoid foreclosure

With a low-risk loan and a stable income, you are in good shape to hold on to a home through even a multi-year slump. But what if you are already struggling to make payments? Your options are more limited then. But there are ways to avoid foreclosure—the forced sale and loss of your home.

First and foremost, say experts, you need to call your lender before the trouble snowballs. The longer you wait to contact your mortgage company, the greater your chance of losing your home.

If the problem is addressed early, a bank or mortgage company might offer one of several options for modifying the loan or allowing you temporarily to pay less than the normal monthly payment (the term for this is forbearance). You should also contact a nonprofit housing or credit-counseling agency for help and advice (see the resources below).

If you can’t make loan payments even with an adjusted plan, you can still avoid foreclosure through one of three steps:

  • In an assumption, a qualified buyer takes over your mortgage debt and makes the payments.
  • In a short sale, the lender might agree to let you sell the home and accept the proceeds even if they are not enough to cover the full mortgage amount.
  • The lender agrees to a deed-in-lieu instead of a true foreclosure. Through this action, you voluntarily transfer title of the property to the lender in return for cancellation of your mortgage debt.

Beware of mortgage scams

Homeowners who do not pay their mortgage are often targeted by criminals who try to con them in a number of ways. The U.S. Department of Housing and Urban Development (HUD) warns against two schemes in particular:

  1. In “equity skimming,” someone posing as a buyer offers to get you out of trouble by taking the deed to your property and promising to pay off your mortgage or give you cash when the property is sold. The “buyer” might also suggest that you move out, after which he collects rent for a while and then skips out. You are left liable for the mortgage even though you have given up the deed.
  2. Phony counseling agencies that offer services for a fee. These are typically things you can do yourself for free, such as working out a new payment plan with your lender.

Before you pay anything, HUD suggests calling one of its approved counseling agencies (see “Resources” below).

Resources

U.S. Department of Housing and Urban Development
For a list of approved counseling agencies go to
www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
800-569-4287 (TDD 800-877-8339)
“Avoiding Foreclosure”: www.hud.gov/foreclosure/index.cfm

HOPE NOW, an alliance of lenders, counselors and other mortgage market participants, provides a hotline called Homeowners HOPE™ at 888-995-4673. It is staffed by HUD-approved credit counselors who can help you explore possible options, www.hopenow.com.

By Tom Gray
Source: Doug Charney, senior vice president, Charney Investment Group, Harrisburg, PA; Freddie Mac, U.S. Department of Housing and Urban Development.

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