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If you are falling behind on your mortgage because money is being swallowed up by other debts, you need to reprioritise your payments or risk losing your home.

Homeowners with unsecured debt problems can often find that they get into arrears on their mortgage because they are focusing on paying credit cards and personal loans.

If a credit card payment is missed, the late payment charges and additional interest added to the account are immediately visible on receipt of the next statement. These companies are also often quick to follow up missed payments with a call from their collection departments

On the other hand, if a mortgage payment is missed, a statement will not be received at the end of the month detailing the financial effects.

Mortgage lenders can also be slower to react in terms of telephone calls and written payment demands.
The result is that the payment of unsecured debt is often prioritised over and above the mortgage.

Risk of repossession

Paying your unsecured debt rather than your mortgage is absolutely the wrong thing to do. If you get into arrears with your mortgage which cannot easily be repaid, you risk your home being repossessed.

If you miss payments to your credit cards and personal loans, your balances will increase and you may face a barrage of telephone calls and letters from the lender’s collections department.

However, the fundamental difference is that your house is not at risk. Reprioritise your payments
If you find that you are paying your unsecured debt payments over your mortgage, you must change your payment priorities.

The starting point is to divide your monthly expenses into priority and non priority payments. Your essential household expenditures including your mortgage and any loans secured on your house should be included in the priority payments list.

All payments to unsecured debts like credit cards, store cards and bank loans should be left in the non priority category.

You then need to calculate the amount of money you have left over each month after all of your priority payments have been paid. This is known as disposable income.

You should use your disposable income to pay your unsecured debts.

Debt management

If your disposable income is less than the amount required each month to pay all of your unsecured creditors, you need to consider debt management.

A debt management plan is the first solution to consider. This will help you reduce the amount you pay to your unsecured creditors so that this fits into the disposable income budget that you have.

The alternative to a debt management plan is an individual voluntary arrangement (IVA).

This agreement has the advantage that debt is written off meaning you are debt free after five years.

Of course both of these solutions have side effects. For example using a debt management plan will significantly extend the time it takes you to repay this debt. An IVA will mean you may to release equity from your home.

For this reason, before deciding which debt management solution to choose, you should get expert advice.
Nevertheless, if you are struggling with debt and getting into arrears with your mortgage, you must take immediate action.

Using debt management will help you reprioritise your payments and will enable you to maintain your mortgage payments and protect your home from repossession.

Source: http://www.beatmydebt.com/news-articles/debts-mean-I-am-struggling-to-pay-the-mortgage-will-debt-management-help.htm

Using an individual voluntary arrangement or debt management plan could be the best way to resolve your personal debt problem but be aware of how your credit rating will be affected.

Your credit rating is the way that banks measure whether or not they should lend to you.

Each time you apply for credit, the bank will look at your credit file to see a record of your borrowing and repaying money in the past. They will then rate you according to their lending criteria and decide whether to lend to you or not.

This process is used when you apply for all types of credit from a mortgage to car finance and even taking out a mobile phone contract.

Your credit rating will get worse if you default on your current credit agreements - i.e. you do not pay back the money you owe on time or if you miss payments.

Late or missed payments are always recorded on your credit file. They give an indication to any lender that you are struggling to repay what you have already borrowed and this will probably mean that they will not want to lend you more until these problems are resolved.

Credit rating affected

If you have a debt problem and are considering using an individual voluntary arrangement (IVA) or debt management plan (DMP), it is important to understand that these solutions will affect your credit rating.

One of the key elements to both an IVA and DMP is that your original credit agreements are broken allowing you to make reduced payments each month based on what you can afford.

When you start one of these plans, even though it is agreed with your creditors, they will still record on your credit file that you have done so and that you have defaulted on your payments.

This will then show up if you apply for more credit and may prevent you from being able to borrow more money.

Not an excuse to avoid a debt problem

The fact that your credit rating will be made worse must not stop you from using an IVA or DMP to resolve a debt problem.

If you are struggling to repay what you owe, you are probably only managing to maintain the minimum monthly payments to creditors by borrowing from one to pay another.

If you continue to do this, your problem will get worse as the amount of your debt will increase. Eventually, you will be unable to borrow anymore and you will be forced to start missing payments.

At this point, your credit rating will be affected in exactly the same way as if you start a DMP or IVA. However your delay in implementing a solution will have resulted in you owing much more and possibly limit the options you now have open to you.

Borrowing again in the future

Using an IVA or DMP to help resolve a debt problem does not mean that you will never be able to borrow again.

Once your debts have been settled or paid, your credit rating will begin to repair again.

The length of time it takes for this to happen will very much depend on the type of debt management solution you use and the type of credit you want.

If you are keen to take a mortgage, this could well be possible very soon after your debts have been paid or even while you are still in an IVA or DMP.

If you want a new credit card, you may have to wait a little longer or start with a very low credit limit.

If you use an IVA or DMP it is important to understand that your credit rating will be affected. However, this should not stop you from tackling a personal debt problem. If you try to protect your credit rating by continuing to making payments funded by more borrowing, you will make your situation worse.

As such, if you are in debt, the best advice is to focus on resolving the problem first. This may take time, but once done, your credit rating will begin to repair and you will be able to borrow again.

A debt management plan can be a very effective way of dealing with a personal debt problem. However, beware that the debt repayment period will be significantly increased and your debts could therefore remain payable for many years.

One of the key steps to resolving a debt problem is to reduce the payments you make to your creditors each month to an affordable amount.

Such action stops you making your debts any worse and gives the creditors regular payments which reduces the number of collection letters and phone calls you receive from them.

These benefits can be achieved by using a debt management plan (DMP). The plan is based around negotiating reduced payments with each creditor to fit within the budget that you can afford.

However, it is very important to understand that the money you owe still has to be paid back in full.

Repayment period increases

Because there is no agreement with your creditors to write off any of the debt that you owe, implementing a debt management plan will mean that the time it takes to repay your debt will increase significantly.

To get a good idea of how long the repayment period will be, you need to divide the total amount of debt that you have by the new amount you are repaying each month in your plan.

This will give you the total number of months you have to pay. Dividing this figure by twelve will give you the repayment time in years.

So for example, if your total debt is 20,000 and you are paying 180 per month into your debt management plan, it will take around 111 months or just over 9 years to repay your debt.

If you do this calculation before starting a debt management plan, you will get a good idea of the debt repayment period you will be facing. However, you must also be aware of additional factors which will affect this.

Interest and late payment charges

Additional interest and charges will increase your repayment period still further.

If you start a debt management plan, here is no legal obligation on your creditors to freeze interest or late payment charges.

Very often, once regular payments are being made, charges will be frozen. However, this will not be immediate and you must anticipate that your overall debts will increase by at least a certain amount because of added interest.

In addition, if you are using a debt management company to help you manage your plan, they may well charge for their services by deducting an amount from your payment each month.

Given not all of your payment goes to your creditors, this will slow down the rate at which your creditors are paid.

You can get a good idea how long it will take to repay your debt using a debt management plan by simply dividing your total debt by the amount your creditors will receive each month.

However, because you cannot guarantee if and when all of your creditors will stop interest and late payment charges, it is very difficult to accurately predict the actual duration of a DMP.

Generally a DMP will significantly extend the debt repayment period and it is very important to understand this when deciding whether or not to use this type of solution.

Generally, if you calculate that it will take much longer than five years to repay your debt using a debt management plan, it may only be sensible to proceed if you anticipate your circumstances improving in the short term.

If this is not the case, you are likely to face a lengthy repayment period with very little light at the end of the tunnel. In these circumstances, it is worth considering alternative solutions such as an individual voluntary arrangement (IVA).

If you have started an individual voluntary arrangement (IVA) but are unable to maintain the agreed payments, bankruptcy could be an option to resolve your debt problem once and for all.

An individual voluntary arrangement (IVA) is a legally binding agreement with your creditors allowing you to settle unsecured debt over a fixed period of five years.

Once agreed, you pay as much as you can to your creditors and at the end of the arrangement, any outstanding debt is written off.

Thousands of people use IVAs every month to resolve their debt problems. The majority are able to maintain their agreed payments without any issue. However, if you are in an IVA and your financial circumstances change, paying the monthly installments may become a problem.

A change in circumstances

If you find yourself in a position where you cannot afford to make your agreed IVA payments, the first thing you should do is speak to your insolvency practitioner (IP). This is the person who is responsible for managing the agreement.

Your income may have fallen, but if you can still continue to make smaller payments, your IP can ask the creditors to accept a variation to your IVA.

A variation would allow your monthly payments to reduce. However, to compensate for this, your creditors could ask you to extend the length of time your IVA lasts.

If you are unable or unwilling to make any further payments into your IVA, you could stop paying altogether. If you do this, then your IP will normally have to fail the arrangement.

At this point your creditors are once again free to take action against you to collect their outstanding debt.

The bankruptcy option

One way of resolving your debt problem if you can no longer pay your IVA is to declare bankruptcy. You simply have to wait for your insolvency practitioner to formally fail your arrangement and then you can submit a bankruptcy application to the court.

You should explain on your bankruptcy application form that you have made your best attempt at repaying your creditors by using an IVA but unfortunately have been unable to sustain the required payments.

Once bankrupt, all of your outstanding debts will be taken away from you and you will only be required to make payments towards your debt if you can afford to do so. Even then such payments will last for a maximum of three years.

If you petition for your own bankruptcy, you will need to pay a fee of 600 to the court. One way of paying this fee is to save the money you would otherwise have paid into your IVA.

Are you a home owner?

If you are a home owner, failing your IVA should be an absolute last resort particularly if you have equity in your property.

After your IVA has failed, the insolvency practitioner has a duty to realise any equity you own in your property for the benefit of your creditors by making you bankrupt.

As a result your home could be sold unless a family member or friend is able to pay to the court a sum equivalent to the equity which would otherwise be released.

If you have a debt problem, you should familiarise yourself about all of the options available to help. You should only start an IVA if you are confident that you can maintain the monthly payments.

After you have started an IVA, you could still decide to stop paying and declare bankruptcy. However, if you are a home owner, this should be an absolutely last resort as you will be at risk of losing your home.

If your circumstances change while you are in a debt management plan, you can increase or decrease your monthly payments accordingly. However, reducing your monthly payments will significantly extend your debt repayment period.

A debt management plan (DMP) is an agreement with your unsecured creditors to reduce the amount you pay back each month to a sensible affordable amount.

A DMP offers benefits such as enabling you to ring fence payments to your priority debts such as your rent or mortgage and stops the need for borrowing from one creditor to pay another robbing Peter to pay Paul.

Another of the major advantages of a debt management plan is flexibility.

Payments can increase or decrease

If your income falls while you are repaying your debt using a DMP, you can simply reduce the payments that you make to your creditors to compensate.

Of course there are some downsides to reducing your payments.

The most obvious is that it will take longer to repay your debt. In addition, there is a risk that your creditors may start to add interest and charges to your accounts once again while the reduced payments are been negotiated.

You should therefore always maintain your debt management payments where possible and if you have to reduce them for any reason, try to increase them again as soon as you can.

Save to settle debt

If the money you have available to repay your debt increases, one option is to simply pay more each month into your debt management plan. This will reduce the time it takes to pay off your debt overall.

However, an alternative course of action is to start a separate savings plan for the extra money you have.

If you are able to save a lump sum, you can use this to settle one or more of your debts.

By settling with one or more of your creditors (particularly the ones which continue to add interest) you will significantly reduce the amount of time it will take to pay back your total debt overall.

Alternatives to debt management

One of the downsides to a debt management plan is the length of time it takes for you to repay your debt.

Many people find that using a DMP means that paying their debt will take over ten years. If your income falls and you pay even less each month, the repayment period will be even longer.

For this reason, if you do choose to reduce your debt management plan payments, you should always try to increase them again as soon as possible.

If you are unable to do this or your repayment period seems impossibly long, it would be sensible to consider the alternatives to a DMP. The main alternative is an individual voluntary arrangement (IVA).

Using an IVA means that unpaid debt is automatically written off after five years giving you light at the end of the tunnel. However, if you do not have enough money each month to do an IVA, you could also consider bankruptcy which in many circumstances, is definitely not as bad as it sounds.

A debt management plan is suitable for many people who are struggling with debt because of the flexibility it offers. Monthly payments can increase and decrease depending on your circumstances.

However, you must always remember that if you reduce the amount that you pay into your plan, the debt repayment period will inevitable increase.

If your debts are large, this may mean that the DMP is no longer a realistic way or resolving your debt problem and you should investigate the alternatives such as IVA.

There are some warning signals or red flags regarding mortgage loans that help borrowers understand that the loan they’re going for would not work in their best interest. Following are four most important signs of a bad mortgage loan.

Borrowing Outside Your Budget

Various online mortgage loan calculators are available to assist homebuyers to obtain a ballpark figure of a reasonable mortgage amount. You can make the most of these free financial tools and buy a home that is within your means. Skyrocketing interest rates and home prices have led to a little slump in demand for houses. A number of lenders consistently sanction problematic mortgage loans. Erroneously, the borrower thinks they can manage to pay for the loan or else the bank would not have accepted the application. This belief is incorrect since lenders don’t take into account particular elements while sanctioning loans. They are health insurance, car insurance, conveyance, daycare and so on.

Mortgage Lenders Support Forging Details

A stirred up housing market encourages various homebuyers to adopt drastic steps. When they don’t have the capacity to afford their dream houses, many people are ready to forge their loan documents, which better their chances of being eligible for the loan. Fake details might incorporate overstating their yearly or monthly income or inflating their assets. On numerous occasions, unscrupulous mortgage brokers support this ploy. Even though a homebuyer can effectively trick a mortgage lender and get the expected loan amount, failure to afford the payment can result in a financial disaster. You must be honest on loan applications. If a fraudulent maneuver is involved, go for any other mortgage broker.

Different Loan Papers Furnished At the Time of Closing

When you reach the closing, sign the loan papers and get your keys, the procedure is formally complete. Mortgage lenders are conscious about the expectation of the homebuyer. Hence, some fraudulent lenders would modify the loan at the eleventh hour and get the new papers to closing. New papers might comprise a separate interest rate, settlement costs, payments and so on. If you don’t go through the new loan documents, this might lead to paying a bigger amount for the loan. If this occurs, don’t be so keen and ask for time to evaluate the documents. Once the loan papers are signed, it’s quite late to challenge modifications or adjustments.

Asking for Signature on A Blank Paper

Novice homebuyers fall prey to various fraudulent operations. A usual ploy is that the mortgage broker or lender requests the borrower to sign on a blank paper. Prior to signing any loan documents, assess the documents. It must incorporate details on the contracted interest rate, monthly payment, loan terms, closing costs and prepayment penalties. When details are not enumerated, you should not sign the papers. It might postpone the procedure somewhat, but it’s always better than signing on a blank paper.

Contributed by MortgageFit Community