In This Chapter
Finding out how much you’re worth
Calculating your monthly income and expenses Checking your credit report
Searching for other sources of cash Holding a steady course
T
he path you take out of foreclosure often depends on your current situa- tion and the resources you have at your disposal. If you have no equity built up in the house and no future prospect of making enough money to catch up on your payments, your best option may be to sell the house or give it away. If, on the other hand, you have some equity in the house and a tem- porary job loss led you to this point, you may be able to refinance your way out of foreclosure.This chapter guides you through the process of assessing your current situa- tion and setting a steady course (financially speaking), so you can more effec- tively deal with the situation without making matters worse. By the end of this chapter, you should have a list of all your financial resources and a pretty clear idea of how much money you have to live on monthly. The information you gather here is critical for exploring your options in Chapter 7 of this book.
Calculating Your Net Worthiness
If you sold everything you currently own and paid off all your debts, how much money would you have? That’s your net worth, and when you’re facing foreclosure, that amount is key in assessing your options. One of the first
questions your lenders or future lenders are going to ask you is, “What’s your net worth?” So grab a pencil and a piece of paper, and do the math. Officially, the equation goes like this:
Net Worth = What You Own – What You Owe
In the following sections, we step you through the process of calculating your net worth and analyzing the numbers.
Adding up what you own
People who are experiencing foreclosure shock often overlook the bountiful riches they have locked up in all the accounts and material goods they own.
We’re not talking about all those nickels in your car’s cigarette ashtray and the change that’s collected under the couch cushions. We’re talking about things of real value, like your home, retirement accounts, and even your 2005 Jaguar.
Estimate the value of everything you own, and then add it all up. The follow- ing list can assist in preventing you from overlooking some of your most valuable assets.
Total the current value of everything you own, including:
Savings account balance Checking account balance
Retirement savings — IRA, 401(k), and so on Cash value of any life insurance policies
Cash
Savings bonds House
Car
Boat
Jewelry
Personal belongings — art collection, model trains, jewelry, antiques, and so on
Furniture Appliances
Valuable equipment, like a riding lawnmower
Don’t overestimate the value of your assets. If you paid $20,000 for a new car three or four years ago, that car has depreciated. To account for depreciation, look up the Kelley Blue Book value of the car at www.kbb.com. You may need to hire an appraiser to estimate the value of jewelry, antiques, and collectibles, but if that’s not an option, at least be realistic about their value.
Adding up what you owe
You already know that you owe some money on your house, but who else do you owe money to and how much? Add up all your debts — everything you owe. Think about it this way: If you died, who would be in line to get paid off?
The following list can assist you in identifying your debts:
Amount owed on the house
Any second mortgages or other loans (such as student loans) Amount owed on your car
Property taxes
Unpaid income taxes due Outstanding bills
Calculating what’s left: How bad is it?
After you’ve totaled all your assets (what you own) and all your debts (what you owe), subtract your total debts from your total assets. The resulting number is your net worth, which is useful in assessing the foreclosure options described in Chapter 7 of this book:
Zero: A net worth of zero means you’re broke. You’re pretty much start- ing from scratch. You may have trouble obtaining loan approval, but if you can get out of your current situation and establish a decent cash flow, you can begin anew.
Negative value: The more negative your net worth, the less likely that you’re going to be able to refinance your way out of the foreclosure. You need to develop a plan to reduce your personal debt (see Chapter 8).
Positive value: A strong positive net worth delivers the most options.
You can sell stuff or borrow against it to buy yourself some time or refi- nance out of the foreclosure. If you have a healthy net worth and you run into financial hardship, you can always sell everything and start fresh with fewer expenses.
A zero or negative net worth doesn’t necessarily seal your fate. It just means that you’re going to have a tougher time qualifying for credit and financing.
When it really becomes a problem is when it’s coupled with a lack of steady income. When you have a zero or negative net worth and your monthly income doesn’t cover your monthly bills, you can’t even sell all your stuff and walk away with a little seed cash to start all over. You still have options, but you may need some additional assistance.
Taking the Pulse of Your Current Cash Flow
Imagine that your house is a big bucket with a garden hose pouring water into it from the top and a spigot at the bottom where the water flows out. The flow of water into and out of the house is like your cash flow. As long as cash flows in fast enough to keep up with the cash that’s flowing out, your finances are stable. If more cash flows in than flows out, you can sock away some money.
If more cash flows out than flows in, however, you begin losing your financial footing.
Now that you know what cash flow is, you may not quite be ready to enroll in the University of Chicago and start working on your PhD in economics, but you know enough to realize the importance of a budget. To establish a healthy, positive cash flow, the household needs to be bringing in more money (from wages, salaries, bonuses, odd jobs, and so on) than it’s spending (on groceries, utilities, mortgage and car payments, gas, and so on). The formula for calcu- lating cash flow is fairly easy to remember:
Cash Flow = Income – Expenses
By income, we mean steady income you can count on. We’re not talking about the million dollars you’re going to win in the lottery or the $10,000 a month you’ll be earning as soon as your online auction business takes off. We’re talk- ing about dependable income, like salaries or the $100 extra a week you always earn by moonlighting as a server at the local restaurant.
Add up all your monthly income and then subtract all your monthly expenses.
The resulting number is your household’s cash flow, and it falls into one of the following three categories:
Zero: Zero cash flow means that you’re just scraping by, living from hand to mouth. Because you’re facing foreclosure, you probably cannot regain your financial footing without increasing your income or reducing your expenses.
Positive: A positive cash flow indicates that you have the financial resources to begin steering more money in the direction of solving your foreclosure problem. The more positive your cash flow, the better.
Negative: When you’re spending more than you’re earning, you’re in serious trouble. Your first order of business is to stop the financial bleed- ing (see Chapter 8). You need to draw up a budget and then stick to it.
Cash flow is an area where couples often get into spats. One partner, who doesn’t quite know how much a gallon of milk really costs, starts accusing the other partner, who does all the grocery shopping, of overspending. If you don’t do the grocery shopping, you may be shocked at just how much it can cost to feed a family of four or five, especially if you have a baby in diapers.
You really need to sit down together, so you both are fully aware of exactly how much money is flowing in and how much is flowing out.
Cash flow fuels your plan. Without a positive cash flow, any plan you develop is doomed to fail.
Checking Out Your Credit Report
Access to loans can often buy you time and enable you to restructure pay- ments in such a way as to make them more affordable. To gain access to loans, however, a fairly clean credit history can help both in obtaining loan approval and in securing loans with lower interest rates.
If you apply for a loan, one of the first things a loan officer is going to look at is your credit history, so make sure yours is accurate and do what you can to remove any blemishes and boost your credit score, as explained in the fol- lowing sections. No irregularity is too small to correct.
Obtaining a free copy of your credit report
You can obtain your credit report through any of the following three credit reporting services, but because lenders may report to only one service, ideally, you should check all three:
Equifax:800-685-1111 or www.equifax.com Experian:888-397-3742 or www.experian.com TransUnion:800-916-8800 or www.transunion.com
For the complete picture of your credit history, request a tri-merge reportthat compiles information from all three credit reporting agencies. Some creditors don’t report to all three agencies, but when lenders check your credit history, they’re probably going to look at everything, so you should, too.
As of September 1, 2005, the Federal Trade Commission has made it mandatory for the three major credit-reporting companies to provide you with a free credit report once every 12 months. To obtain your free credit report, do one of the following:
Submit your request online at www.annualcreditreport.com.
Phone in your request by calling 877-322-8228.
Download the Annual Credit Report Request Form from www.annual creditreport.com/cra/requestformfinal.pdf, fill it out, and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
Picking out key details
When you receive your credit report, inspect it carefully for the following red flags:
Addresses of places you’ve never lived
Aliases you’ve never used,which may indicate that someone else is using your Social Security number or the credit-reporting agency has mixed someone else’s data into yours
Multiple Social Security numbers,flagging the possibility that informa- tion for someone with the same name has made it into your credit report Wrong date of birth (DOB)
Credit cards you don’t have Loans you haven’t taken out
Records of unpaid bills that you either know you paid or have good reason for not paying
Records of delinquent payments that weren’t delinquent or you have a good excuse for not paying on time
Inquiries from companies with whom you’ve never done business (When you apply for a loan, the lender typically runs an inquiryon your credit report, and that shows up on the report.)
An address of a place you’ve never lived or records of accounts, loans, and credit cards you’ve never had may be a sign that somebody has stolen your identity. Contact the credit-reporting company immediately and request that a fraud alert be placed on your credit report. For tips on protecting yourself against identity theft and recovering from it, check out Preventing Identity Theft For Dummies,by Michael J. Arata, Jr. (Wiley).
Patching bruised credit
Your credit report should contain your credit score. (If it doesn’t, contact the credit-reporting agency and request your score.) Credit-reporting agencies often assign you a credit score that ranges roughly between 300 (you never paid a bill in your life) and 900 (you’ve had a credit card for a long time, borrow small amounts often, always pay your bills on time, and don’t carry any huge balances). Each credit reporting agency may use a different scoring method and range of scores, so you can expect some variation.
Your credit score determines not only whether you qualify for a loan, but also how much you’re qualified to borrow and at what interest rate. A high credit score lets you borrow more money at a lower interest rate.
A credit score of 700 or higher is superb. Anything below about 680 raises red flags. If your credit rating dips below 700, take steps to improve it, such as the following:
Dispute any erroneous items on your credit report.Most credit- reporting agencies supply you with an address to submit a letter of dispute.
Apply for fewer loans and credit cards.Applying for several loans or credit cards in a short period of time can make you appear financially desperate and significantly lower your credit rating.
Pay off your credit card balances, or at least pay off enough so the balance is 50 percent or below your available credit limit.If you have sufficient equity built up in your home, you may be able to refinance or take out a home equity loan to pay down your high-interest credit card debt. Of course, if one of your creditors has already initiated the foreclo- sure, you may have trouble getting loan approval.
For additional tips on boosting your credit score, check out Credit Repair Kit For Dummies,by Stephen R. Bucci (Wiley).
Digging Up Other Stashes of Cash
The foreclosure process can be so emotionally devastating (as explained in Chapter 3) that you just want to crawl into a dark cave and hide from the world, but that’s not going to solve anything and is almost guaranteed to make it worse. In times of need, you need other people, particularly friends and family members who have the resources to lend you a hand.