10

Say your a home-owner, a first time buyer. You've just got your first flat and your about 1 year into your 25 year mortgage.

Suddenly, something goes wrong with your job, and your made redundant (credit crisis and all)

You look for other jobs, but struggle, your forced at worse case scenario to take a job stacking shelves at a supermarket, but that merely pays your food+electric let alone anything else

What happens in this case? Do you get evicted because you just can't make up the money for mortgage? Can you "freeze" your payments? Or get insurance to cover you?

NB: For the record, this isnt my case, I would like to become a first time buyer in the next year or so but with an unstable market in the IT sector I'm concerned this may be true to many people, and wondering how this can best be tackled

6

Think about your priorities in life. Everybody is a little different. In my case I have a wife and child, so these are priorities for me, and you might have your own depending on your story.

  1. I need a place for my family to live
  2. I need my family to be able to eat
  3. I need a clothes for my family to wear.

So if I lost my job, and I have no more money coming in (unemployment insurance runs out, savings depleted) then the bank can have the house. I personally would probably drop the house long before it came to that point.

The first thing you do is talk to your creditors and work out a deal. At the same time I would stop paying for ALL unnecessary things (cable TV, extra cell phones, automobiles, leaving light bulbs on and turning the heat up over putting on a sweater). If I can't get a good deal from the creditors, I would stop paying the mortgage, find a place to live (family, friends, cheap apartment) while the credit is still good.

My advice is to get yourself setup while your credit is good and you have SOME money in the bank. Waiting until the bank decides to foreclose is probably going to make your harder.

3

Honestly, the best way to manage this risk is to manage your savings appropriately. Many experts recommend that maintain a reasonably liquid account with 6-9x your minimum monthly expenses for just this occurrence. I know, easier said than done. Right?

As for insurance, I can only speak for what is the case in the US. Here, most mortgages will require you to get PMI insurance until you have at least 20% equity in your house. However, that insurance only protects the BANK from losing money if you can't pay. It doesn't save you from foreclosure or ruining your credit.

Really, the type of insurance you are talking about is Unemployment insurance which all states in the US make available to workers via deductions from their paycheck.

The best advice, I suppose, is to keep your expenses low enough to cover them with an unemployment check until you have accumulated enough savings to get through a rough patch. That may mean buying a less expensive home, or just waiting until you have saved a bigger down payment.

If you didn't plan ahead, and you are already in the house, another option might be to extend your mortgage. For example from a 20 to a 30 year to reduce your payments to a manageable level. A more risky option might be to convert to a variable rate loan temporarily, which typically carries a lower interest rate. However, it might be hard to secure a new loan if you don't currently have an income.

3

I am lucky enough to have chosen a flexible mortgage that allows me to change payment amounts at certain, very lenient intervals (to a minimum amount). So when I was laid off, the first thing I did was call my bank to lower my payments to a level that allowed me some breathing room, at my new, lower income. If and when my family's income increases, I'll re-adjust my payments to a higher amount.

But if you're concerned about the "what if"s in this economy, I'd definitely choose a mortgage that allows for flexibility so that you don't lose your house if you don't have to, particularly if your situation is temporary.

  • How did you get into that kind of mortgage? Was it in the US? – Benjamin May 21 '10 at 18:09
  • 1
    Option ARM's (adjustable rate mortgage's where you have the option of paying different amounts) were one of the causes of the credit crisis, because people often paid less than the interest on their loan and went underwater. You may not be able to get one anymore, and there will be plenty of fees. Making an option ARM work requires an immense amount of discipline. If you lack the discipline, you may be better off renting than dealing with the stress of foreclosure or a short sale. – SpecKK Aug 11 '10 at 17:09
2

If you have doubts about the long term prospects at your employer or jobs in your area, you may want to keep the option of moving to find a new job open while you save up for a larger down payment on a house.

While there are insurance products out there that claim to cover your mortgage, they often have loopholes which make them difficult to collect on. Insurance companies are in business to make money and premiums are high when it's likely that people will try to collect. Splitting those premiums into your mortgage and your own self-insured unemployment fund (i.e. an emergency fund in a money market bank account) will usually be a better deal. As always, make sure you have term life insurance for a family and long term disability insurance just in case something really bad happens in the near term.

Buying a home is a better financial decision when you know you'll be in an area for at least 5 years. Saving until you have 20% down on place that you can afford to pay off in 15 years (even if you take a 30 year loan) will be a lot cheaper and less stressful.

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