1. Don't Pay the Mortgage
Now that the bank has initiated the foreclosure process, the Cartwrights should not make any more payments. But they must take the full amount they were paying and put it into savings. When the time comes for them to move—it could be in two months, six months, or even longer, given the tremendous backlog in foreclosed homes—they will need to have plenty of cash to make a hefty security deposit on a rental. The Cartwrights' FICO credit scores were in rough shape before the foreclosure notice, and when we spoke, Hank's had fallen to 531. On a scale of 300 to 850, that's very low, and it will make it harder to convince a landlord to rent to them. But by offering a security deposit of as much as six months, they will likely be able to allay a landlord's concerns.
2. Do Pay the Credit Card Companies
While the Cartwrights cannot afford their mortgage, Hank is clear about wanting to continue to pay down the credit card debt. "I'd really like to make good on this," he says. I support that all the way—making sure to never miss these payments is their best hope for raising their credit scores.
3. Scale Back
I challenged the Cartwrights to scour their spending for ways to come up with the $350 they need for the student loan payments. I noticed that they spend a combined $250 a month on their landline, cell phones, and cable. I want them to get rid of the landline and reduce the cell and cable plans so the bill doesn't exceed $100. That's $150 right there. We also agreed there would be no vacations this year, saving another $1,000, and that their $130 monthly restaurant budget needed to be reduced.
4. Get More Protection
The Cartwrights have term life insurance policies, but they aren't large enough. Right now the policy on Hank's life is for $400,000 and Diana's policy is for $300,000. I want them both to have $1 million policies. If anything were to happen, the surviving family members could cover living expenses with interest income, rather than eating into the principal too quickly. Filling in the shortfall between their current policies and the $1 million benefit should cost them less than $100 a month combined. I also gave the Cartwrights free access to my Protection Portfolio, available at SuzeOrman.com—it's a kit that helps you generate standard legal and financial documents. I told them they needed to create a will, a trust, and an advance directive that would spell out their healthcare wishes if they are ever unable to speak for themselves. These are all must-have safeguards.
5. Focus on Saving
I asked Hank and Diana to research the going rate for rentals in their town; they hope to stay in the same area so the girls can keep attending the strong public schools there. Most rentals fall in the $1,500 per month range—$1,000 less than their current mortgage. That extra money must go toward building an emergency savings fund that covers eight months of living expenses. Once that's accomplished, they need to get serious about saving for retirement.
6. Accentuate the Positive
I encouraged the Cartwrights to view this juncture in their life as an opportunity, not a punishment. Losing this home won't be easy. But the money they save will be the foundation for a much brighter future.
Next: What you should know before applying for a mortgage modification
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Suze Orman's most recent book is Suze Orman's Action Plan: New Rules for New Times (Spiegel & Grau).