February 22, 2019
Ways to Buffer Yourself From the Potential of Mortgage Default
A report based on research by the JPMorgan Chase Institute, “Falling Behind: Bank Data on the Role of Income and Savings in Mortgage Default,” officially declares something that few homeowners are unaware of on a visceral level: the chance of falling into default on one’s mortgage increases with a sudden and substantial decrease in income, especially when that state lasts for a protracted period of time. (In other words: if you’re fired from your job and don’t have another one lined up to replace it, chances are you will have some trouble making that monthly mortgage payment.)
Interestingly, the research reveals that this fact remains true no matter the economic situation of the buyer at the time of purchase—whether high income or low income, high debt-to-income ratio or low debt-to-income ratio.
But there is one major mediating factor in how quickly default may occur: the more savings a homeowner has managed to sock away at the time of income loss, the longer they may put off defaulting on the loan by drawing from reserves for a period of time. That gives homeowners something of a buffer between loss of (or drop in) income and loss of their home. And that can make a huge difference.
Indeed, those borrowers who had put into reserve an amount less than a single mortgage payment had a higher default rate, at 2.54 percent, than did those who had managed to sock away four or more mortgage payments worth of reserves, whose default rate came in at only 0.36 percent.
The implication for borrowers in Rhode Island, Massachusetts, and Florida is clear: once you’ve established your loan, do everything you can to begin building a nest egg. The bigger the better. Nobody wants to have to spend savings just to keep from going into default on a home loan—but if something should happen to make the other alternative the loss of a home, those savings could mean everything.
Here at Topouzis & Associates, P.C., we provide title insurance to back our title services. When you’re purchasing a new home, the policies we connect you with provide peace of mind that your new property will not bring along any nasty surprises. Whether you live in Providence, Rhode Island; Cambridge, Massachusetts; or Boca Raton, Florida, feel free to contact us for more information.