How To Avoid Foreclosure
You must have read the recent post about the New York Times economics reporter who is facing foreclosure himself. Edmund Andrews covered the US economy and Alan Greenspan for over six years, but despite his financial accumen still got suckered into a loan he couldn’t really afford. He hasn’t made a mortgage payment in 8 months and is wondering when the bank is going to throw him out of his house. Instead of making his payments, he has been busy spending money on a beach rental, clothes, gifts and other necessary expenses. At some point, I think foreclosure is inevitable.
But could he have avoided foreclosure?
I think so. Let’s review some of the financial mistakes he made. The real ones, not the excessive spending that set in once he stopped making house payments!
1. He divorced his wife of 21 years
This is always grounds for economic disaster. No matter who you are, the longer you stay married, the more it’s going to hurt you financially. If you are going to divorce, do it like Tom Cruise and get out before the magic 10 year mark or before you have kids.
2. He paid almost 2/3rds his net income in child support
Ouch! Paying $4,000 in alimony and child support when your net income is $6,777 is a lot. Effectively, his take home income is $33,000 per year or about $16/hour. I think most people on that wage move back home to their parents basements.
3. He bought a house he couldn’t afford
If there’s one major recipe for disaster, it’s buying a $500,000 house when you’re only taking home $16/hour. He really should have known better. But then again, he outsourced the analysis of his finances to his mortgage broker instead of doing it himself. He was set up to fail from the beginning. I’m sure his broker knew in the back of his mind there was a chance Ed would face foreclosure at some point. But Ed really should have bought a cheap house instead.
4. Not spending enough time understanding the most expensive purchase of your life
A home mortgage is the most complex financial transaction you’ll probably ever undertake. So it’s easy to blow it off or let some one else do the heavy lifting for you. However, the mortgage broker doesn’t necessarily have your best interest at heart. They get paid on commission for every loan they close and are directly incentivized to get you into the largest, most outrageously expensive home loan possible. There is a tremendous conflict of interest and you should not let them dictate what you should do. Many people claim that a home loan is just too difficult too understand. True, but only if you don’t take the time to understand it.
I strongly recommend Randy Johnson’s stellar book How to Save Thousands of Dollars on Your Home Mortgage. If you don’t know what Yield Spread Premium (YSP) or Paid Out of Closing (POC) means on a HUD-1 you definitely should read this book. If you own a home and don’t know a HUD-1 is then get your spouse to smack you and then go buy the book! I promise you’ll save thousands of dollars on your mortgage.
. If you don’t know what Yield Spread Premium (YSP) or Paid Out of Closing (POC) means on a HUD-1 you definitely should read this book. If you own a home and don’t know a HUD-1 is then get your spouse to smack you and then go buy the book! I promise you’ll save thousands of dollars on your mortgage.Just in case, you missed that last paragraph, BUY THAT $12 BOOK ABOUT SAVING THOUSANDS OF DOLLARS ON YOUR HOME MORTGAGE. You should buy it before you buy a house, before you even think of buying house, maybe before you even graduate from college. If you’ve already read it, you should buy a dozen copies of the book and gift it all your friends, co-workers, in-laws, cousins, nieces and nephews for Christmas. Unless you hate them.
The best way to prevent foreclosure from happening to you is to buy a house you can afford with a mortgage that is the cheapest over the life of the loan. That may mean paying extra points to buy down your interest rate, which means the cheapest loan is not necessarily the loan with the lowest closing costs. Learning about your finances, and how mortgages actually work is probably the best way to save money in the long run.
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May 26th, 2009 at 3:39 am
There is an underlying issue here as well. It lies in the middle of divorce and the judge that allowed 2/3rds of a fathers income to be stripped and given to his ex. There needs to be caps on how much is allowed. Worse then losing his home, which is also a huge breakdown in the family, is that this man will not have anything to offer his visiting kids and soon they will not come.
The judge and courts allow money to destroy families everyday and it needs to stop.
May 26th, 2009 at 5:47 pm
lving off dividends:
i checked out the book by randy johnson from the library. i don’t think it is worth purchasing. it really is your blog, but i still believe that if you are getting compensated for advertising his book (in addition to the revenue from amazon), i think it behooves you to have full disclosure.
dedicated:
this andrews guy is an adulterer who got found out by wife #1. he didn’t divorce out of “irrevocable differences.” he got what he deserved – so don’t blame the judge or the system (which probably has lots of holes, but they don’t apply in this particular case).
plus, there is speculation that he is paying the high alimony in order to keep his retirement benefits. more details can be had at boston gal’s.
- s.b.
May 26th, 2009 at 6:01 pm
Yeah, the $3.07 I wil make from the 6 people who buy that book is really why I’m promoting it. The fact that the average person knows absolutely nothing about mortgages and that the author (who did a loan for two of my close friends) is one of the few honest brokers has nothing to do with it.
As someone who’s bought multiple houses and helped dozens of other people buy investment property, I think I’m well qualified to judge a good book on mortgages.
Here’s my disclaimer: If you don’t learn anything from that book, then you’re either very savvy or you’re an idiot. In both cases, that book will not help
May 31st, 2009 at 2:31 am
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June 8th, 2009 at 7:34 pm
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June 10th, 2009 at 2:47 pm
500,000$ mortgage really send chills down my spine. Although I’m in college right now and can’t dream of having 1/1000 of that money , but I don’t believe I would have the gut to purchase a home that expensive. Why do people need house like this? There must be something special about it that normal and broke college student like me can’t understand.
June 13th, 2009 at 11:54 am
I blogged on this also and all I can say is: “Get out of my head!”
It makes me crazy to think he’s getting rewarded for his stupidity. Oh well, I guess that’s the world we live in now. Do everything wrong and you get bailed out & a book contract. Do the right thing and your taxes go up.
Betty