Layoff may be temporary but mortgage isn’t
Dear Liz: My son recently learned that he likely will lose his job April 1. He is a fireman and there is a chance the layoff might be temporary, depending on city budget negotiations.
If he loses his job he will not have the income to keep his house, where he is upside-down. He owes $300,000 and the house is valued at $190,000.
He just paid the February payment and is now unsure what to do next. He doesn’t want to lose his house but he is currently living paycheck to paycheck and certainly can’t afford the payments without a job.
Should he stop making payments and let it go into foreclosure, which will ruin his good credit rating that he has worked so hard to maintain? Will the bank work with him to modify his mortgage before he loses his job? Could I buy the home in a short sale to keep the home in the family?
Answer: To answer your last question first, probably not. To get a short sale approved, lenders typically want an “arm’s length” transaction to avoid the possibility of fraud.
Your son should talk to a housing counselor approved by the U.S. Department of Housing and Urban Development. He can find referrals at www.hud.gov. The counselor can review his situation, discuss his options and help him navigate the loan modification process, if that’s the route he chooses.
If his unemployment is indeed temporary, he may only need mortgage forbearance (a temporary suspension of payments) or a short-term modification to keep his home. Either could negatively affect his credit, but the consequences would be less severe than the damage done by foreclosure.
Even a single skipped payment can knock 100 points off his credit scores, so he should avoid missing payments until he’s decided on a course of action.
Carefully spread credit card debt
Dear Liz: You’ve written that it’s generally better to have small balances on several credit cards than a big balance on one card. Would you please elaborate on this?
When it comes to revolving credit, it was my understanding that the credit score is looking at the total utilization for all revolving debt. For example, I have the following: a Visa card with a limit of $10,000 and a balance of $5,000, another Visa card with no balance and a $20,000 limit, and a furniture store card with a $2,000 balance and a $5,000 limit.
My total revolving credit available is $35,000 and my utilization is $7,000 or 20%. Before reading your article, I was considering transferring both balances to the high-limit card. My utilization would still be 20%, so why would it be better to leave the balances on the other cards?
Answer: The leading FICO credit scoring formula looks at both your overall credit utilization and the credit utilization on each card. That’s why the company that created the score, also known as FICO, advises that in general it’s better to have small balances spread across several cards than a big balance on one card.
In your case, however, shifting balances would probably leave you better off. Instead of credit utilizations of 50%, 0% and 40%, you’d have utilizations of 0%, 35%, and 0%.
There’s no hard and fast rule about how much of your available credit you should use on each account. The less you use, the better.
No returns guaranteed
Dear Liz: You suggest that wealth can be accumulated by regular savings and earning an average rate of return of 8%. Where can a safe 8% return be found?
Answer: The same place leprechauns hide their gold.
There is no truly “safe” investment. Investments that have no risk of principal loss, such as federally-insured bank accounts, typically offer such low returns that they expose you to “inflation risk” -- in other words, your deposit’s buying power is eroded over time.
If you want to stay ahead of inflation over the long run, you need some exposure to the stock market because that’s the only investment class that’s consistently outperformed inflation over time. According to Ibbotson Associates, the stock market has returned at least 8% on average annually in every 30-year period, starting in 1928. So even if you invested on the eve of the Great Depression, you could have knocked out an 8% return if you just hung on long enough.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 12400 Ventura Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at www.asklizweston.com. Distributed by No More Red Inc.
