The Wall Street Journal has a portrait of [tag-tec]distressed homeowners[/tag-tec], Mario and Leticia Montes, describing how they are really being forced to live. They are still struggling but may be facing a probable [tag-ice]foreclosure[/tag-ice] in the future.
This is the family that wanted the American Dream so badly they risked everything, including their younger daughter’s piano lessons, to buy a house they couldn’t afford.
Would they be candidates for your future creative real estate financing?
With a combined income of $90,000, they are currently paying $38,400 per year on their shaky sub-prime home loan. Add two car payments totaling $700, plus college loans for their eldest, and you have a potential disaster in the making.
Recently Mario took another job working part-time on weekends for a catering service, and is planning on getting a third job.
My guess is having to look his younger child in the eyes to tell her he couldn’t pay for the piano lessons probably motivated him more than anything else.
The Montes haven’t reached the reset hour yet. That’s coming in December. When their sub-prime loan kicks into high gear they’ll owe $50,000 per year. That’s a big jump in monthly mortgage payments. Will they be able to do it? Or will they join the legends of other distressed homeowners who have to turn the keys back to the bank?
It won’t be a happy holiday season for them.
Where did the Montes go wrong?
1. They fell for the refinance promise
Yes, ARM’s can work for investors who can flip in time. But these folks didn’t realize how dangerous such creative real estate financing can become.
Now they can’t refinance. They’re stuck with the old loan and they’ll have to live with it or lose their home.
Worse, the value of their home is less than it was when they bought it.
2. They didn’t really understand what they were getting into
Will this argument fly?
“But I blame that on that I don’t understand the lingo they were talking,” she says. “It’s a scary experience…All I could see was all these numbers flash before me… I said, ‘Mario, I hope you don’t get into something that is going to hurt us.”
As if that wasn’t bad enough, more bad news came a little later after their property taxes increased to $6,000 per year from $2,900.
They had not seen that train wreck coming either.
3. They don’t have the savings and equity they need to stay afloat.
Sub-prime borrowers who become future distressed homeowners face foreclosure primarily because they got in over their heads. They’ve been on shaky ground all along.
But it was because they didn’t have the savings to put into a larger down payment that got them to the edge of the cliff.
Now, they can’t build equity. This is a classic example of a distressed homeowner who may go into foreclosure.
My advice to them is to sell the house, but they probably won’t be able to get their investment out of it.
Folks like them panic when real estate prices go down instead of up because everyone knows real estate never loses value, right? The seasoned investor knows that’s just another factor in doing business and prepares for it ahead of time.
Are they in big trouble? Yes, and it will only get worse. Think of what will happen to folks like the Montes if the economy takes any kind of dip.
Will you be ready to help them, and others like them, avoid [tag-self]foreclosure[/tag-self]?