Real Estate Articles
Risk of Debt Leveraging in Buying a Home
Rathin Neogy, MBA
In the U.S. and Canada, one often hears about the importance of debt leveraging
in the acquisition of real estate property. With borrowing having become easy
in today’s market given the competition among institutions, more and
more lenders are offering home loans without asking for “income verification”
or “stated income.”
This now makes it possible to borrow more money than if one went to a lender
who requires information on earnings and expenses for approving a loan.
Thus, in markets where the housing affordability index is low, two-income couples
are now able to purchase a home without much fuss. Also, once the value of
your home appreciates, lenders come after you to refinance your home and take
money out. This is where a lot of American families get into trouble. It is
alright to take some of your equity out and re-invest it wisely. However, with
the temptation of improving one’s lifestyle, more and more families are
spending their money unwisely by buying non-essential luxuries, expensive vacations,
etc.
In most of these cases, the couple is still able to survive as long as both
continue to work and maintain their employment status. The problem begins when
one member loses his or her job? If you have high debt leveraging, your problem
becomes potentially more serious! All of a sudden, the couple finds it difficult
to pay their mortgage payments. Initially, with their good credit, they still
may be able to borrow even more by getting, for example, a home equity or other
type of personal loan. This may keep them going for a while. But, after a few
months, when they start having problems servicing their increased debt, they
start becoming delinquent on their high ticket items such as their mortgage
payments.
In many markets, the consumer is still not threatened with foreclosure. Property
values appreciate allowing the consumer to refinance their homes by equity
cushioning that usually prevents the loss of property due to loan default.
In some cases the borrowers can avert a problem by quickly selling their home
and paying off their indebtedness. In most cases, however, a homeowner hopes
that their financial problem is temporary and that they somehow would be able
to hold on to their home.
But the important fact about our economy is that it cyclical. A period of growth
for a few years is inevitably followed by a recession when jobs are lost and,
if you are overstretched financially, you seriously risk losing your home through
foreclosure.
Specific steps are followed before your lender can legally foreclose and knowing
this is the first step in preventing foreclosure and seriously damaging your
credit. A few months after the loan has gone into default — sometimes
several months — the lender issues a notice of default (NOD), which is
recorded against your property in the county where you reside. You are allowed
a reinstatement period, usually of three months, to bring the loan current
by paying arrears, lender’s costs and expenses. On lapse of this grace
period, the lender issues a notice of trustee’s sale, which informs the
borrower the date the property will be sold in auction. At this point, you
can still stop the foreclosure if you can pay off the entire balance of loan
plus foreclosure costs within the last five business days before the trustee’s
sale.
Long before you reach the point where a lender issues a notice of trustee's
sale, you need to take aggressive action. After receiving a NOD, the first
step to take is to decide whether to sell your property. Once you make the
decision to sell your home, it is very prudent to employ a good realtor who
can find the best way to sell quickly. An experienced agent will also appreciate
the need of not just getting offers but finding well qualified buyers who can
close escrow as quickly as possible. So select an agent who agrees to a short-listing
agreement. This way he will be motivated to work aggressively in marketing
your home. You may also consider raising your agent’s commission. Be
sure to also enter into a contract with your agent that you have the right
to terminate the contract, with a 7 to 10 days written notice, if you feel
the agent is not effectively marketing your home.
Finally, in conclusion, it is generally a good thing to use debt leveraging
when you own your home. Make sure, however, that you do not overextend yourself
in case of downturns in the market. A good rule—of—thumb is to
always have at least six months worth of liquid assets to help you tide over
unexpected setbacks.
(The author is a Broker—Associate with the Sterling Real Estate company
in San Diego, California. He has been practicing real estate since 1997.)
Disclaimer: The opinions expressed in this article are solely those of the
author and do not represent those of the Sterling Real Estate company.
The article is written by:
Rathin Neogy, MBA
Broker-Associate
The Sterling Real Estate Company
