Situational Outcomes

In order to determine the best solution for you, you'll need to analyze your current financial situation and where it could be in the next 60 days. If you're behind and don't have a way to continue to make the payment, then it's possible that 60 days is all the time you'll have; foreclosure is imminent.

Step One
Review your own personal balance sheet. If you don't have one it's easy enough to draw up with a pencil and pad.

On the left hand side itemize your current Assets, both liquid and non-liquid. On the right hand side list your monthly obligations

Cash in Bank (Savings and Checking)$3,000
Stocks, Bonds, Mutual Funds$2,000
Retirement Plans$4,000
House Value$150,000
Automobile Value$10,000
Total Assets$169,000
Mortgage Loan Balance$220,000
Car Loan Balance$2,000
Total Liabilities$222,000

Net Worth (Assets - Liabilities) = ($53,000)

This table shows that your current net worth is -$53,000 due to your home being underwater.

Now let's review your income and debt.

  $5,000 / month
Housing (incl. taxes & insurance) $2,500
Car Payment $500

Your current debt load is 60 percent of your gross monthly income ($3,000 / $5,000) meaning your debt ratio is 60. If your take home pay is $4,000 per month after deductions then that's what you have remaining to pay the mortgage and the car payment.

As you can see, there's not a whole lot left.

The first order of business is to increase the income. Yet that's not really advice at all, that's a given. If finding a new job or getting a raise is not possible now, the other side of the coin is to reduce expenses.

This is a relatively simple example. Your situation is likely crowded with more expenses then are listed here, yet the methodology is the same.

First, can you bring the loan balance current with the funds you have? If you're two months behind on your mortgage with another one coming due, can you come up with $7,500 in cash and still have enough money to keep the water and lights on and still have money for food?

If you are behind on two mortgage payments and the next missed payment will trigger the foreclosure, can you at least make one payment? Even though you received the pre-foreclosure letter stating how much it will take to get current on your note, the bank won't foreclose until you miss three payments. By making one payment and staying two payments behind, you'll be able to buy a little time.

Next, look at the car payment. That's $500 per month that could be going towards your mortgage instead. The automobile balance is $2,000. Does it make sense to pull some cash from one of your accounts and pay off the automobile loan entirely? On the other hand, maybe you can sell the automobile for $10,000, pay off the $2,000 car loan balance and put some cash in the bank. There are several reliable cars for $5,000 or less that you can buy until things get better.

Remember, this exercise is to keep you out of foreclosure, not to keep your car.

This example also shows that there is a retirement account balance of $4,000. Many retirement plans allow for either a loan against that balance or what is called a "hardship" withdrawal to let you cash out your retirement funds without penalty. A pre-foreclosure letter is certainly a hardship.