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Business: Financial Services, Mortgages
Information on mortgage loans<, mortgage brokers, financing, foreclosures, refinancing and anything else related to home loans and personal finance. Finding low APR loans and tying mortgages into your personal finance mix.
First Time Mortgage
Buying a home for the first time stirs plenty of emotions. You’re elated to be purchasing your first home, but a little wary of the buying and mortgage process. As you’re shopping and searching for your house and your mortgage loan, keep these things in mind.
- You shouldn’t make an offer on a home until you’ve been pre-approved.
- Know that there’s a difference between getting pre-approved and pre-qualified. Pre-qualified means you’ve been given an estimate based only on information you’ve told the lender. Pre-approved means your credit and income have been checked and you’re more likely to get a loan for that amount. If you make an offer before you get pre-approved, your offer may be higher than what a lender is willing to loan you.
- You can negotiate.
- Depending on the credit and down payment, you may be able to get your mortgage to reduce your interest rate by half to a full point. Lowering your interest rate usually results in a lower monthly mortgage payment. Be careful though, some lenders will lower your interest rate, but add the interest back into the mortgage, so you’re really not saving any money in the long run.
- Your credit influences your mortgage loan.
- How you’ve been paying your bills in the past, if you’ve been paying them at all, has a direct influence on whether you get approved for a mortgage loan, the amount you’re approved for, and your interest rate. Check your credit report and credit score to see where you stand so you won’t be surprised at what the lender tells you.
- The down payment isn’t the only cash you’ll need.
- Before you move into your new home, you’ll go through a process known as closing. This is when you sign the loan documents and get the keys from the seller. You’ll have to pay several fees at closing that can total $3,000 to $7,000 depending on the amount of your mortgage. Your lender should give you a good faith estimate upfront that estimates how much your closing costs will be. You can sometimes negotiate to have the seller pay some of the closing costs. Otherwise, you’ll be responsible for the full balance.
- It’s ok to shop around for the best mortgage loan.
- In fact, it’s better to shop around to make sure you’re getting the best interest rate. Don’t worry about your credit being hurt because you’re shopping around. The credit score calculation has a buffer built in to keep mortgage inquiries from affecting your credit score within a certain window of time. Do your shopping between 30 and 45 days and you’ll be fine.
- Your mortgage payment may be more than your home.
- Monthly mortgage payments include four things. First, there’s the principal on the home. This is what you borrowed to purchase the house. Then, there’s interest, which the lenders fee for loaning money to you. Homeowners insurance is included to protect your property in case of a fire or other hazard. Finally, your property taxes are added. You can eliminate insurance and property taxes from your mortgage payment by finding your own homeowners insurance company and paying taxes on your own. Your lender may require you to send proof that these have been paid.
For years, home ownership has been considered the American dream. Before you take on this huge responsibility, you should assess whether you’re ready for that dream to come true. As much as you may want to purchase a home, the truth may be that you simply can’t handle the financial responsibility. It’s better to wait to buy a home, than to get one you can’t afford.
- Do you plan to move soon?
- Home ownership makes the most sense for people who plan to live in their homes for more than five years. That’s because during the first few years of your mortgage loan, you’ll only be paying interest. You won’t have gained enough equity in your home until you’ve been paying for several years. If you happen to make some money off a home sale within the first couple of years, you may owe capital gains taxes on the profit.
- Renting is way cheaper.
- If what you’re paying in rent is 35% less than what your mortgage would be, then it’s often wiser to continue renting. But if your monthly rent is on par with a monthly ownership costs, then you may be able to handle home ownership. Remember that monthly home costs include mortgage, property taxes, homeowner’s insurance, and often homeowner’s association fees.
- You can’t pay off your past due bills.
- Before you take on a mortgage, you need to take care of your past due debts. Otherwise you won’t get approved for a mortgage. If you did get approved, your interest rate wouldn’t be so great. Chances are, if you can’t afford to pay off your debts, you won’t be able to afford the extra costs that come with home ownership.
- You haven’t been at your current job more than three years.
- Mortgage lenders want you to have consistent, reliable income before they’ll give you a mortgage loan. If you’ve been job-hopping the last few years, you may not have the stability you need to keep up with a mortgage payment. The same thing goes if you’ve recently made the transition to self-employment. If you have your own business, lenders generally want to see three years of tax returns to verify your income.
- You haven’t done any research.
- If you simply wake up one day and decide to go house shopping, you’re asking for trouble. There are so many ins and outs to the home buying and mortgage borrowing process, that you’ll need at least a few weeks to get acquainted with the process. Don’t rely on your mortgage lender, real estate agent, or mortgage broker to tell you what you need to do. Use the internet and library to get information about mortgages so you make the right decision.
- Little or No Down Payment Necessary
- A time existed that you couldn’t get a mortgage without at least a 20% down payment. While some lenders have returned to that time, many lenders can arrange 100% mortgage financing. You can even buy a home with 2%-5% down payment. Something is always better than nothing.
Two major types of mortgage loans exist: the fixed-rate mortgage and adjustable rate mortgage. A fixed-rate mortgage is pretty straightforward – the interest rate stays the same for the life of the loan. Adjustable rate mortgages, or ARMS for short, are far more complex. These mortgages have interest rates that fluctuate over the life of the loan. Because the interest rate for an ARM changes, so does the monthly payment.
- Adjustment period
- The adjustment period is the period of time between interest rate changes. Interest rates on an ARM can change anywhere from monthly to annually, sometimes even every five or fifteen years. The shorter your adjustment period, the more often your interest rate will change.
- Index and Margin
- An ARM’s interest rate has two parts: an index and margin. The index is a base interest rate and the portion that moves up and down when the interest rate adjusts. Indexes are usually based on other interest rates like the London Interbank Offered Rate (LIBOR) or 1-year constant-maturity Treasury (CMT). Indexes are usually published in major newspapers or on the internet, so you can watch them change and predict the resulting change in your ARMs interest rate.
- The margin is an extra number of percentage points the lender adds to the interest rate. The margin plus interest is your interest rate. The margin is the only part of the ARMs interest rate that doesn’t change.
- Interest Rate and Payment Caps
- When your ARM has an interest rate cap, it is a maximum limit on the amount your interest rate can increase. There may be a periodic adjustment cap that keeps your interest rate from rising a certain amount from one period to another. Or, there can be a lifetime cap that sets the maximum amount your interest rate can ever be.
- The payment cap limits the amount your monthly mortgage payment can increase at the adjustment period.
- Hybrid ARM
- A hybrid ARM has a fixed-rate period and an adjustable-rate period. During the fixed-rate period, the interest rate remains the same. After that, the interest rate can adjust on a periodic basis. You can tell how long each period lasts by the way the interest rate is advertised. For example, a 5/1 ARM has a fixed-rate period of five years. After that, the interest rate will adjust every year for the remainder of the loan. The first number tells you the length of the fixed-rate period and the second number lets you know how long the adjustment period will be once the fixed-rate period has expired.
- Interest-Only ARM
- With interest-only ARMs, your monthly payments only cover the interest for a certain amount of time. During the interest-only period, your monthly mortgage payments will be smaller than if you were also paying interest. Once the interest-only period ends, your payment will increase, sometimes much higher than comparable mortgages, because you’re just beginning to pay back the mortgage.
- Option ARM
- An option ARM gives you the flexibility choose which payment you want to make each month. You can make a traditional principal and interest payment, an interest-only payment, or some other minimum payment. If you don’t make at least the interest payment on an option ARM, your mortgage could suffer from negative amortization – a situation that happens when your loan balance decreases rather than increases.
Imagine making an offer on the home of your dreams: three bedrooms, two car garage, great yard, quiet community. Then, imagine having to take back the offer because you don’t qualify for a mortgage large enough to buy the home. You can save yourself the heartache of missing out on your dream home by knowing ahead of time just what size mortgage loan you qualify for. Get pre-approved.
Mortgage pre-approval is like going through the application process before you ever start looking for a home. The mortgage lender looks at your income and checks your credit history, then tells you how much mortgage you qualify for. Many lenders will lock-in this mortgage amount and guarantee that you can borrow that amount, assuming nothing about your financial situation changes.
- Pre-Approval vs. Pre-Qualification
- Don’t get pre-approval confused with pre-qualification. During pre-qualification, the lender asks some questions about your income and credit history, then gives an estimate of how much mortgage you can afford. However, this estimate can’t be guaranteed because your credit hasn’t been checked and your income hasn’t been verified. If you purchase a home based only on a pre-qualified amount, you could be disappointed later.
- Benefits of Getting Pre-Approved
- By getting pre-approved, you can save time during the home shopping process because you know certain homes are out of your price range. No sense in looking at the $200,000 homes when you only qualify for the $150,000 mortgage (unless you have the other $50,000 in cash somewhere).
- Home sellers take you more seriously when you have a pre-approval letter in hand. They know you have financing secured and are more likely to accept an offer from you than if you hadn’t been pre-approved. If your offer is competing with one from someone who doesn’t have secure financing, you have a better chance of getting your offer accepted.
- Pre-Approvals Can Go Wrong
- A pre-approval offer isn’t set in stone. There are a few things that can make your final loan amount change. For one, if your credit changes, your loan amount could go down. While you’re shopping for a mortgage, you need to be on top of all your other finances. Pay all your bills on time, don’t add more credit card debt, and don’t apply for additional credit cards. Pretend your credit is frozen for a few months.
- If your income changes, your pre-approval amount can change. For example, if you or your spouse loses a job, you may not qualify for the same mortgage amount. In that case, you’d probably want to delay your home purchase anyway.
- Don’t expect to get approved for the same mortgage amount if you go with a different lender from the one you were pre-approved with. Lenders don’t usually guarantee pre-approvals from other lenders.
- Pre-approval letters usually have a time limit, so if you don’t apply for the mortgage within that time period, you may not get a loan that’s the same amount of your pre-approval. Once you find a home you like, make an offer, and get your mortgage before the pre-approval expires.
For most every homeowner, a mortgage loan was necessary to avoid buyers having to pay the total home price in one lump sum, something most of us can not afford to do. When you take on a mortgage, you have the financial obligation to make on-time payments based on the price of the loan plus interest, taxes, and insurance.
- Structure of a Mortgage Payment
- Essential components of a monthly mortgage payment will depend upon the amount of your mortgage loan and the terms within the loan. The term of the loan is the length of time you have to pay back the loan in full. Longer terms, like the traditional 30 year term, will result in smaller monthly payments for the borrower but for a longer period of time. 30 year mortgages will also cost the buyer more overall when interest is factored into the equation. A shorter term loan, like a 15 year mortgage, will make the buyer pay much higher payments each month but will also more money to be applied to the principle of the loan. A 15 year mortgage will allow you to be a homeowner in a faster period of time and save you a lot of money in interest charges.
- The mortgage payment is comprised of several elements that make up the total amount due. Here is a breakdown of these components:
- Principal Amount Due
- The principal amount on a mortgage loan is the amount the borrower received from the lender. Loan repayments are set up so that initially very little of your loan payment goes toward principal and over time the principal amount due will increase. This is due to lenders structuring loans so that the first few years of payments are devoted primarily to interest payments. As time goes on, more of your monthly payment will start being applied to your principal.
- Interest Charges Due
- The interest on a mortgage loan is essentially the payback to the lender for the borrowed money. The lower the interest rate, the lower a borrower’s monthly payment will be. The calculation of your interest payment will also depend on the type of interest rate you have as a condition of your mortgage loan. An adjustable rate means the interest on your loan changes with the market. Adjustable rates will affect your monthly mortgage payments on a monthly basis. Fixed rates will remain the same throughout the entire course of the loan.
- Tax Payments Due
- Many of today’s lenders require that real estate taxes be placed in escrow. This means in addition to the principal and interest charges due on your mortgage loan, you will also be paying for your property taxes within your monthly mortgage payment. Property taxes will be collected through regular mortgage payments and held by the lender in an escrow account. When taxes are due, the lender will pay them in full directly from the escrow account. Tax payments change from year to year so if your taxes increase or decrease, it will affect how much you must pay each month with your mortgage.
- Insurance Payments Due
- Like property taxes, lenders often require buyers to escrow their homeowner’s insurance payments as part of the mortgage terms and conditions. When the insurance payment is due, the lender will make the payment in full from the escrow account. Additionally, a second type of insurance may also be rolled into your mortgage payment. This insurance is called Private Mortgage Insurance, or PMI, and is required by lenders for any homebuyer who can not put down 20% or more of the home price as a down payment. PMI helps reduce the risk on behalf of the lender should the borrower default on the mortgage loan. PMI coverage can be discontinued after a homeowner has created at least 20% equity in the home.
- When considering becoming a homeowner, it is important to ensure you have the financial means to cover not only the cost of the principal and interest of a mortgage loan but also the expenses rolled into the loan as required by the lender. Too often homebuyers bite off more than they can chew and miscalculate how much their mortgage note will be. By understanding how a mortgage payment may be structured, you will be able to make a more informed decision about your financial capabilities when it comes to buying a home.
Imagine this scenario: You find the house you adore. You do the legwork on mortgage loans and get pre-qualified for the right amount. The price is more than reasonable and the buyer is happy to accept the offer you put in. You are on Cloud Nine and diligently work to submit your required paperwork to the lender. A few days or weeks go by and you finally here from the lender – they have rejected the home you want. It is a nightmare that does happen to home-buyers. The question is how is it you can get so close to closing and lose the entire deal based on the lenders decision.
- Home Rejection Rationale
- Provided your loan application was completed and included all requirement documentation per the lender, the denial could be for several reasons that are not actually house related. Here are some of the other reasons for a rejection:
- Credit Risk
- While you may have been pre-qualified for the mortgage loan, at the final decision time the lender may have reconsidered your credit worthiness.
- Home Appraisal
- After you have submitted your application paperwork, the lender may have found reason to be concerned about the home appraisal and the home condition. This is becoming more common among lenders today.
- Home Value
- Appraising a home can be difficult especially if the home you are considering is unusual and it is next to impossible to find comparable homes. Lenders can often doubt the appraised price of the home and if it is indeed relevant to the true value of the house.
- What Can You Do?
- Before letting anger take control of your emotions, consider first what the lender is telling you. If there is something that is spooking a reputable lender, be certain you want to take a risk with buying the property. Because potential buyers often get lost in the moment, it can difficult for them to see the big picture including what troubles with the home lay ahead. A red flag to a lender should be a warning for the potential buyer.
- If you are certain you want to move forward on the purchase of a home, you’ll need to order and pay for another appraisal. If the second appraisal is consistent with the first, you may have to convince the lender to reconsider their decision. If the second appraisal comes in lower than the first, you may have to ask the seller to decrease the price of the home, even if you have already made an offer, in order to get the lender to agree to the loan.
- As a final step, if you have already found the perfect home you may have to consider finding another lender. Visit a local credit union or a smaller community bank that may be more apt to lend to you with more flexible terms. This may also be the right move because community banks and credit unions are much more familiar with the area you want to purchase in, whereas larger banks have no idea about the nuances of a particular home or neighborhood. Consider contacting a mortgage broker as a last resort who may be able to match you with a lender based on your unique situation.
When you are k a mortgage loan, you must first check out the variety of lenders who say they can help. A mortgage is serious business and it can also be a complex process that too few potential homebuyers truly understand. Without clear knowledge of what to expect and what the mortgage loan process involves, buyers risk defaulting when they can’t keep up with the financial obligations because they didn’t understand the contracts they were signing.
Meeting with a mortgage lender is a good way to clear the air and really get to know the process of applying for and closing on a loan. It is important you find a lender that will work with your specific financial situation and be willing to details the process for you.
Here are 5 things to ask a potential mortgage lender before you sign on the dotted line:
- What Kind of Interest Rate Can I Get?
- The interest rate is one of the most important factors in a mortgage loan and since it is influenced by many of your own financial status. The interest rate will affect your monthly payment so ideally you want to find the lender offering the lowest rate. Buyers who are creditworthy will likely be the most eligible candidates for a low APR. The higher a buyer’s risk of default based on credit score, the higher the APR on the mortgage loan will be. You also want to know what kind of rate you are going to get on the loan. There are two types: fixed and adjustable. A fixed rate will stay the same throughout the life of the loan while an adjustable rate will vary.
- What Are the Closing Costs?
- Closing costs are paid out at the closing of the loan. They include application fees, home appraisals, credit reports, title insurances, attorney fees, and other associated expenses. The lender is required to provide buyers a Good Faith Estimate that outlines the fees involved with the closing within a three day time period of a mortgage loan application. Discuss with the lender which of the fees may be waived if possible.
- How Long Will Processing Take?
- Securing a mortgage and closing on a home is not a quick process. You’ll want to check in with the lender about the time frame of the mortgage process. This is especially important when interest rates are low because applications tend to pick up, causing a backlog in processing. Reputable lenders should be able to tell you how long each part of the process will take from application to closing.
- How Much Down Payment Do They Require?
- In light of the recent crisis in the mortgage industry, lenders are much stricter about who they are lending money to and the requirements for getting approved for a mortgage loan. Nearly all private lenders will require at least 20% of the home price to be put down to close on the loan. There are down payment assistance programs offered by many states and buyers can also check into government-sponsored programs that do not require the full 20% down.
- What Will My Payment Be and Can I Prepay?
- Every buyer will need to be clear on what their monthly payment will be and what the payment will include. Some mortgage lenders will require that all property taxes and home insurance be escrowed and included in the monthly mortgage payment. Without understanding your monthly payment amount, you will not be able to adequately analyze your budget to ensure you can afford the loan payment. You also want to ask if there are any penalties for prepaying your loan in an effort to pay it off early.
- Each buyer will also have specific questions that relate to their financial situation. Be sure to write down any questions or concerns you may have about the mortgage loan process, especially if you are first-time home buyer. By being informed before committing to a loan, you will reduce your own confusion and the risk of defaulting on your loan and facing foreclosure.
With many big decisions in life, it makes sense to have a source to go to when you need help in understanding a deal. There is no greater time to need help than during the process of finding a mortgage loan. Because loans nowadays come in all shapes and sizes, it is wise to be selective in your choices and diligent in your research.
A mortgage broker can be a resource for guidance through the selection process. The broker will not actually make the home loan for you but will guide you through the process of selecting the right lender. With so many deals to be hand, a mortgage broker can help be sure you have covered all of your bases.
Here are the benefits and disadvantages consumers may experience when working with a mortgage broker:
- Credit Concerns: If you have special financial considerations to make like poor credit histories or a lower-than-average score, a mortgage broker may be able to better pinpoint the direction you need to go in to secure a mortgage loan.
- Financial Difficulties: It may also be helpful to a broker when you are concerned about lacking down payment or closing cost funds. A broker will be well-versed in lenders who cater to financial difficulties.
- Time: If you are looking for a lender, it can take a lot of time to scour the Internet and informational resources to find the right one for you. By employing a broker, you get out of doing the legwork it takes to find the right lender and mortgage loan for your situation.
- It Costs Money: Brokers do charge a fee for their services. The main disadvantage of getting help is the additional fees charged by the broker. Typically however, the fee is rolled into the loan at a higher interest rate or paid out as a closing cost by the buyer.
- Not For Your Benefit: If you do not work with a reputable broker, chances are good they will not be looking out for the best interests of your situation. In fact, some lenders will not work with select brokers due to risky behavior and unprofessional tactics.
How To Find the Right Mortgage Broker
Locating a good broker can be done through referrals by your realtor, family, and friends. You can also find them online or through the local phone book. Look for those who are associated with the National Association of Mortgage Brokers (NAMB) to ensure they are licensed and have a proper level of credentials. The important step is to interview each potential candidate before signing on. High-pressured sales tactics and obvious lack of professionalism should be immediate red flags. Look for a broker who is thorough in exploring your situation and needs. Be clear about the costs of the brokerage fee and how they are to be paid out.
Remember that you can find a mortgage loan without the aid of a broker if you are looking to save money. If finding the right mortgage seems overwhelming and confusing, the professional services being offered by mortgage broker agencies can be a definite benefit when in search of a new mortgage loan.
After the recent crisis in the mortgage industry, consumers are rightly concerned about the lender they choose to handle their own mortgage loans. Fear of schemes, scams, and con men have driven consumers to be more astute at selecting a lender. This is good news for everyone involved and with more consumers checking out lenders before making a commitment, the mortgage world can be a safer place.
Selecting the right lender for you is not as impossible as you may think. Here are some tips for finding the lender who will meet your needs and see you successfully through the mortgage loan process:
Rushing through the process of finding a good lender with the right mortgage loan for you is the biggest mistake you can make. By understanding first-hand where your credit score lies and knowing what answers you need to find, you can conduct a more thorough search for the perfect lender. Get your facts together and know what kind of loan you are looking for, what price range you are considering, and how fast you want to act. Never be in a hurry to get a mortgage loan because the mistakes you can make in a rush will cost you financially.
Get Reputable Referrals
If you are already involved with a realtor, this is a prime place to start. Ask your realtor for lender referrals. Since they are in the business of selling houses, there is a good chance they know just the right person. You can also solicit referrals from friends, family, and co-workers who may be familiar with mortgage lending companies.
The Internet provides a wealth of information but in some cases, it can be information overload. If you choose to conduct an online search for lenders, be cautious about the data you uncover. Start looking locally before making online inquiries or you run the risk of being junk mailed to death with offers. There are also several websites that promise banks knocking down your door for your business if you just answer a few questions. Proceed again with caution. Select a few potential lenders that might be a fit and then stop looking for now.
Background Check Lenders
Again, with technology there is a wealth of information to be found but you have to take it with a grain of salt and do some of your own legwork. Contact lenders directly by phone to discuss your situation and what you are looking for in a mortgage. Make a list of questions you’d like to ask them in person. Find out about the APR, closing costs, application fees, credit score requirements, and other financial data. Once you have interviewed several lenders and none seem to be a good fit, conduct another search and interview process.
Head to the BBB
The Better Business Bureau can provide you with the information that may help define your decision. The A+ to F rating system and the complaint listings for mortgage lenders will appear right on the site. You can scroll through the BBB’s website for feedback on the companies you are researching.
Get With Your Gut
A consumer’s gut instinct is often right on target. If you have interviewed with a high-pressured sales pitch from a lender or some of the conversation just didn’t sit right with you, take your own feelings into consideration. Armed with self-confidence and knowledge, you’ll make a better decision about your mortgage choices.
When President Obama set out to establish an assistance resource for homeowners that could not afford their payment any longer, many people grabbed on to the glimmer of hope. But the Home Affordable Modification Program, in effect since 2009, did not produce exact results. In fact, many people were left worse off then where they started.
What Is a Mortgage Modification?
Under the Home Affordable Modification Program, homeowners who could no longer afford their current loan payments could seek relief from lenders. Mortgage providers were basically required to open the door for modification considerations on existing loans in order to make payments more reasonable. The terms of the original loan were reworked so homeowners could secure a smaller, more manageable monthly payment.
Unfortunately, due to the high demand for modifications, lenders became overwhelmed. This led to the need for trial modifications to give lenders time to review an applicant’s finances. In the event the modification is granted, the modification becomes permanent and the borrower continues to pay monthly under the new modification terms. However, if after the trial modification period has ended and an applicant is not approved, the borrower is back at square one and faces foreclosure on a loan they can not afford.
No Guarantee With Modifications
The reality of the HAMP effort is many of the temporary modifications were later denied permanent status. Modifications were cancelled after a homeowner could not stick with the new payment structure. In some cases, homeowner’s that did pay as agreed during the trial still had their modifications canceled. In all cases, borrowers were financially obligated to pay all late fees and the balance due or face foreclosure.
There is speculation that home modifications were denied on purpose to benefit the lender. Currently many top lenders are on the receiving end of class action suits filed by disgruntled homeowners. Any win in a lawsuit will not provide relief for struggling homeowners, as the trial process is long and lenders want their money. Lenders often do not waste time in issuing late fees and other penalties for loan defaults. Additionally, your own credit score will suffer negatively.
How To Decide if A Modification Will Work
The first thing a homeowner needs to do when facing financial issues is start to plan ahead. Rushing into any modification without a clear objection will led to decisions which may not turn out in the best interest of the homeowner. Take a very god look at your current mortgage, your budget, and be honest about your ability to afford your current home.
If you plan to stay in your home, you need cut expenses where you can or supplement your income to meet your financial needs. Refinancing will likely not be an option if you are already in trouble but plenty of borrowers find ways to get back on track. Contact your lender about other programs or options for temporary hardships if a modification is not in the cards.
If you face the facts and realize the home your live in is no longer affordable, make plans to sell your home before foreclosure proceedings have begun. It may be difficult to find a buyer or to get the price you are looking for on your home, but you’ll need to weigh your options carefully and act in a timely manner to ensure you can effectively remove yourself out from under the current mortgage.
A home loan modification is not a guaranteed fix but it can be an option for eligible homeowners. Speak with your lender about your options for saving your home or avoiding foreclosure as soon as you recognize financial hardships.