Which debt to pay off first?

For all of you struggling with bills, it can be very overwhelming if you’re short on cash to know which debt you should pay off first.  Do you pay your car payment? your mortgage? your credit card bill?  One of the leading finance experts in the country, Suze Orman, prioritizes the order in which you should pay down debt if money is tight.  The video of her Debt Loyalty List can be found here.

1. Any debt owed to the IRS.  If you have tax payments due or past due, it’s best to pay them first.  A lot of you may not agree with this.  However, the IRS has legal authority to seize your accounts and possessions at any time.  While a bank would take time to legally go through the proceedings to foreclose on your house, the IRS can take what they want when they want.  Be done with them first.

2. Student loan debt.  The reason this is so high up on the list is because this debt can can not disappear in a bankruptcy filing.  Even if you ask for a delay, the interest will continue to add up.  And unpaid student loans can take money out of your wages if you’re behind.

3. Personal debt.  Suze recommends that any debt owed to friends or family be paid off next.  While this debt might not come with an interest rate, she says that most people who loan you money do so because they trust you to pay it back.  It can negatively affect a relationship.  And Suze’s motto is “People, then money, then things.”

4. Mortgage debt.  So this does come up higher on the list than a credit card.  While it can take time for the bank to literally have you removed from your home, once you miss that first payment, the process starts.  You can always try to refinance your home or apply for a loan modification.   Be aware that if you apply for a loan modification and you’re under a temporary modification where you’re paying less each month, the bank can require all that money you saved be paid back if your modification isn’t approved.

5. Car loan debt.  Suze has this one above credit cards because most people still need transportation to get to their job to continue to make more money.  If you don’t have a car to work, you’re in bigger trouble than not paying a credit card.

6. Credit card debt.  Since credit card debt is unsecured (meaning that if you don’t pay it, they can’t come in and seize your home, your car, etc.), it’s best to pay this one last.  So by no means does it make sense to take a loan out of your 401K or against your IRA to pay this down.  That money is protected from bankruptcy if it comes to that.  Also, be aware that you can contact your credit card companies to try to negotiate interest rates or have them forgive debt amounts.  In terms of which credit card of many to pay off first, always go with the one with the highest interest rate.

What do you think of her order?  Do you agree or would you change it?  I’d love to hear your thoughts.  Please leave me a comment or visit me online.

How the foreclosure process works

A new report from the U.S. Treasury Department shows that Chicago ranks 3rd, behind Los Angeles and New York, of cities whose homeowners needed assistance from the Obama administration’s mortgage assistance program.  These are people who are going through loan modifications to be able to stay in their homes.

While that’s good news for those struggling to make payments, it just proves the amount of people who are still losing their homes to foreclosure on a daily basis.  I thought I’d give a quick overview on the 6 phases of a foreclosure, for those of you who know somebody going through it or might be going through it yourself.  This will give you a full understanding of how the process works.

1. Missing a payment.  This happens after the first missed mortgage payment.  Your lender will usually send a letter or statement indicating that they have not received the payment.  After two payments are missed, you will likely receive a demand letter.  At this point there’s still a good chance the lender will work with you on catching up with payments.

2. Notice of default.  After 3 months without a payment, the loan is transferred to the foreclosure department.  The notice will be recorded that money is owed and you’ll typically receive another 3 months to catch up and to make the payments.  This is known as the reinstatement period.

3. Notice of trustee’s sale.  So now it’s been 180 days, or 6 months, since the first payment was missed.  This gives you an idea of how long the foreclosure process takes from beginning to end.  At this point they’ll advertise the trustee’s sale in the county the home is located in.  You’ll see this notices in your local newspaper that includes the owner’s names, property address, and sale information.  The lender has to publish this information for three weeks prior to the sale date.

4. Trustee’s sale.  This is the actual sale.  The property is sold to the highest bidder who meets all the requirements.  The lender will determine what is a fair opening bid.  If sold at this sale, the home now belongs to that purchaser who can immediately take possession and evict the previous homeowners.

5. Real estate owned.  If the home was not sold at auction, the lender now owns the home.  They’ll most likely put it up for sale with a Realtor.  Most of the time, the current owners are already gone from the home.  Sometimes these homes will be in very poor shape, left that way by the previous owners.  Other times the bank will have paid money to make changes to make the home more attractive to new buyers.  If you’re looking to purchase a home and your Realtor tells you it’s an REO or real estate owned, you will now know what that means.

6. Eviction.  You can usually remain in the home until it’s either sold through the trustee’s sale or as an REO.  Once it’s been sold, the sheriff will come to evict anyone still in the house.  They can remove people and their belongings that are left in the home.  If you’ve left the home on your own and there are belongings still there, once the home is sold, those belongings will most likely get thrown out.  So be aware of that.

If you know that you are going to have trouble making payments, do your best to speak to the lender beforehand to try to work out an arrangement.  It’s worth talking about a temporary or permanent relocation.  There are even companies nowadays that can help speak to the lender on your behalf.  More information can be found in this MSN article. If you have any more questions, please leave me a comment or visit me online.

Government help for those underwater on 2nd mortgage

So now homeowners that are having trouble paying their second mortgage can be eligible for possible modification.  I was a little unsure of this initially, thinking about all the people who are struggling with paying their first mortgage.  I was wondering, “Why are we worried about those with two?”  But it makes sense.  Homeowners who are trying to get modifications on their first mortgages that have two mortgages are the ones having the most trouble.  Many lenders won’t do modifications or take losses on the loans of their first mortgage unless the second lien-holder does, too.  And because second mortgages usually are for a much smaller loan amount, homeowners are able to keep up with those payments. And that’s where this plan coms into play. 

Here’s what the Obama administration is introducing.  It’s called 2MP.  Currently it’s only available to those whose second loan originated on or before January 1, 2009.  Anything originated after that is not currently eligible.  And the first mortgage needs to be modified under the Federal program.  If the lender or lien-holder on the second mortgage is also participating in that program, they have to offer to modify the second mortgage.  They’re required to defer the payment of the same proportion of the principal that was deferred on the first loan.

Right now the program is expected to help about 1.5 million homeowners.  So far Bank of America, Wells Fargo, Citigroup, and JP Morgan Chase participate.  Bank of America recently started sending letters to home equity customers introducing this possible modification.

My concern is that it’s still too difficult to work out.  I understand and appreciate what the government is trying to do.  The banks are taking their sweet time approving these modifications, making it extremely difficult for customers to get them done on their own.  With the amount of time it takes to connect to someone, fill out paperwork, and hear back, it’s almost like a part-time job.  I’ve had clients say they’ve had to submit paperwork multiple times to their lender and still haven’t heard back.  It’s worth it to lower payments if you have the time and perseverance to wait.  It also may be worth it to you to talk to a company that offers to assist with loan modifications on your behalf.

More information on this new program can be found here. And I can be found on my Web site.

Knock on your door? It could be your mortgage company

In an effort to help delinquent borrowers on their home loans, Freddie Mac just announced that they will be going door to door.  Freddie Mac has hired Titanium Solutions, Inc. to knock on homeowners’ doors around the country if they are behind on their mortgage payments.  This is all in an effort to reduce the amount of foreclosures across the country.

door_knock_200x300If you have a mortgage owned by Freddie Mac, you could receive a knock on your door.  They are coming to homes where the homeowners haven’t responded to their phone calls or letters OR if they need to provide additional documents or information to begin their three month trial under Obama’s housing bill to get a loan modification. 

According to CBS Moneywatch.com, “By meeting with our borrowers, one on one, in their homes Titanium Solutions can help them overcome the roadblocks keeping them from starting their Home Affordable Modification trial periods,” said Ingrid Beckles, Senior Vice President Of Default Asset Management at Freddie Mac. “We believe this can give borrowers seeking Home Affordable Modifications the same type of personalized guidance they may have had when they were buying their home or applying for their mortgage.”

They are taking a step in the right direction in terms of gathering your personal information.  To avoid fraud, Titanium Solutions will not be allowed to accept mortgage payments from people in the house.  They’ll also carry a copy of the letter that was initially sent to the borrower.  In other words, don’t allow anyone into the house that doesn’t have this information.  You can click here to obtain more information on this and other programs that Freddie Mac has implemented to help stop foreclosures.

This is one of the newer ways that mortgage companies are assisting their borrowers.  Some will help you with loan modification programs by a phone call and with proof of an inability to make your payment.  Other people have found assistance by getting their local congressmen and women involved.  The upside to this program is that these agents will help you fill out documents to get your loan modified.  They aren’t just stopping by to hound you into paying.

What do you think of Freddie Mac’s program of going door to door?  I’d love to hear your thoughts.  Please leave a comment or visit my Web site.