Owning a home has been called an American Dream. But signing up for the wrong kind of loan can quickly turn homeownership into a financial nightmare. Here are some tips on how to prepare for homeownership and recover from foreclosure once its begun.

What should I consider before becoming a homeowner?

There are five factors every potential homebuyer should consider.

1. Your Credit Rating - Before purchasing a home, be sure to obtain and review all three major credit reports. Annualcreditreport.com allows you one free report annually from each credit bureau and each report will provide direction on ways of improving your credit score.
2. What Can You Afford - Know what you can afford for a monthly payment before you begin shopping. Also consider your entire financial picture and any outstanding debt. Online financial and mortgage calculators can assist you in the process to determine how much house you can comfortably afford.
3. Maintenance - Remember when the roof leaks or the dishwasher needs to be replaced, you will be the one to pay instead of your landlord. Experts recommend setting aside an amount equal to 10% of your mortgage payment to save for unexpected maintenance costs.
4. Down Payment - The best practice is to have 20% down payment to avoid private mortgage insurance; however there are programs available to assist with this. The Illinois State Treasurer's Office offers a program called Our Own Home to provide extra security on mortgages that lenders might otherwise reject.
5. Understand Your Interest Rate and Fees - Examples of mortgages are given below and it is very important to understand not only how your mortgage works but what your interest rate will be. Bankrate.com can assist you in understanding interest rates, points and fees as well as help you in shopping for the best rates available.

Top

What types of mortgages are available?

There are many types of mortgages products available and it is important to understand yours. Here are a few of the most popular types of mortgages:

1. Fixed Rate Mortgages - One of the most popular and highly recommended types of mortgage, this mortgage offers fixed interest rates to consumers throughout the life of the loan. With fixed rate mortgages, there will be no fluctuation in monthly payments, making it easier to budget and eliminating the risk of resetting interest rates.
2. Adjustable Rate Mortgages - Also known as ARMs, these mortgages offer a lower introductory interest rate, which can appear far more affordable for those with limited funds or those looking for great value. Consumers must understand that ARMs are not ideal products if you are planning to stay in your home over a longer period of time. When your introductory rate expires, your reset rate could be several percentage points higher, which could increase your mortgage payment by hundreds of dollars a month.
3. Two-Step and Balloon Mortgages - These mortgages contain various repayment options, the most popular in recent years being interest only payments. The loan payments are lower because payment covers only interest and doesn't reduce your principal amount owed. Either at the end of the loan or the interest only period, you will be required to settle the remaining balance. In today's market where home values are declining, you may not only owe the entire balance of the loan after making interest only payments, you could actually owe more than your home is worth!

Top

What can I do if I begin to fall behind on my mortgage payments?

Here are the basics steps to follow if you are behind or anticipate falling behind on your mortgage:

1. Contact Your Lender Right Away - your lender may be able to provide alternatives to assist you. DO NOT avoid lender communication hoping the problem will go away. Ask your lender if a loss mitigation specialist is available to assist you with your mortgage - many lenders have individuals who can assist you directly to find a solution to your problem.
2. Seek Outside Assistance - If assistance isn't available through your lender, contact a HUD-approved housing counselor who can help speak to your lender on your behalf to work out a solution.
3. Know Your Rights - locate your loan documents to determine what your lender can do if you are unable to make payments.
4. Understand Foreclosure Prevention (also known as loss mitigation) Options - The FHA can provide valuable resources to help.
5. Prioritize Your Spending - review your monthly budget to determine any luxuries you might temporarily eliminate in order to stay current with your mortgage. The Illinois Department of Financial and Professional Regulation can help you find a credit counselor licensed by the State of Illinois to assist you in reviewing your budget.
6. Avoid Foreclosure Scams - foreclosure information is also public information and people in financial crisis may be deceived by empty promises to help "get you into a new loan," "buy your property," or "save your credit." Visit the Freddie Mac website to learn more about How to Avoid Predatory Lending.

Top

Can foreclosure be prevented once the process has begun?

Yes, however it is important to seek assistance right away.

• If your financial problem is temporary you may benefit from a repayment plan, forbearance or reinstatement. A long-term situation caused by loss of employment, medical situations or the like may require more permanent alternatives like mortgage modification or partial claim from your mortgage guarantor.
• Sometimes keeping your home will simply not be financially possible; in these extreme circumstances discussing short sales, assumptions and deeds-in lieu with your lender may be the best alternative. Visit the FHA website for additional information on each of these options.

Any time you are seeking financial assistance, be sure to thoroughly check out any agency that will assist you with your finances or your home. A HUD-approved counselor can evaluation your financial situation and help you determine what steps to take. Always avoid organizations making promises too good to be true: agencies promising debt settlement, credit repair or pre-approved refinance offers to save your home. Don't be taken advantage of by predatory practices, take the initiative to find help today.

Top

Learn more, help others.

• Download and distribute our Foreclosure Prevention Flier.
• Read more about homeownership and foreclosure prevention at Illinois' Tomorrow's Money website.

Top