Facing Foreclosure - Paying Off Credit Cards Vs Saving Up
For a Workout Solution
By Nick
Adama
Homeowners facing foreclosure often find that, when they
are not making the mortgage payment, they have some extra
room in their budget, even if it is not enough room to resume
regular monthly housing payments. But many of them consider
paying off their other debt, such as high-interest credit
cards and personal loans, while attempting to get back on
their feet to qualify for a solution to the foreclosure.
Is it better to pay down other debt or is there a better
way for the homeowners to use this little bit of extra money?
This is a good question, because homeowners have some serious
decisions to make about their other debt when they are unable
to make the mortgage payment. There are a number of considerations
here, though, and it can be difficult to determine what the
best use of that money will be. It is not always best to
pay off credit cards at the expense of putting away savings
or trying to work out a solution with the mortgage company.
First of all, the owners need to decide if they are willing
and able to save the house or not, because this will help
them put their money through the best channels. If they are
unable to stop foreclosure at all, then it might just be
best to keep paying off the other personal debt, such as
credit cards and student loans. It will not keep their credit
score as high as it was before they started missing mortgage
payments, but it may prevent even more drastic decreases
in their scores.
But if they do wish to keep their home, the homeowners need
to examine a few different options for doing so. Especially
in terms of qualifying for a mortgage modification or foreclosure
refinance, there is a fine line to walk between paying down
other debt and establishing a savings account to use in paying
down the mortgage to qualify for the workout plan. If the
homeowners do one, they may not have the resources to do
the other.
In terms of paying down or off the personal loans, this
can free up extra monthly income that the homeowners would
be able to use once they qualify for a repayment plan or
other solution. Banks do not want homeowners spending more
than 50% of their total income on debt payments including
the mortgage, so they will not approve a solution if the
homeowners still have a large debt load. Using some of the
money not being paid to the mortgage company to pay off credit
cards can free up a significant amount of the owners' incomes.
This would also help if the homeowners were considering
a bailout loan from a foreclosure lender. With the high interest
rates that most of these lenders charge, it is important
for the homeowners to have as much of their income as they
can to dedicate to the monthly housing payment. Paying 29%
on a credit card and 14% on a foreclosure bailout loan means
that there will need to be enough income for the banks to
decide to give the homeowners another chance.
But on the other hand, even though paying down other debt
can improve the owners' credit scores and help them qualify
for a solution to foreclosure, they also need to consider
their savings accounts. The original lender may require several
thousand dollars to start a forbearance agreement or modification,
and the homeowners may not have this available if they have
been focusing on paying down credit cards. As well, foreclosure
loan sources may not be willing to lend the owners as much
as is needed to pay off the mortgage in full, so they will
be required to use savings to pay of part of the mortgage
at closing. This also requires the owners to have enough
savings to complete the loan.
In the end, the decision whether to pay down personal debt
deserves careful attention by homeowners facing foreclosure.
Although it can help preserve their credit scores, they may
need extra funds if they have any plans to stop foreclosure
and keep the house. If they are not able to save their home,
then it may be best just to pay off debts as quickly as possible
to make a clean break; but if they wish to prevent the house
from being lost, they need to weigh the benefits of paying
down debt to the disadvantages of having less money in savings
to qualify for a plan.
