Smart financial planning to prevent home foreclosure

Smart financial planning generally starts years before you decide to purchase a home. Taking the right financial steps is critical to ensuring that you have the money to buy the right house, you avoid buying a house you cannot afford, and you use the right financial strategies to pay for the home.

What happens if you fail to properly plan and you buy more home than you can afford? If the market substantially declines and you cannot sell your home, you could possibly face home foreclosure.

Given the importance of financial planning to prevent a home foreclosure, let's review some of the most important financial steps you should take before a home purchase.

Smart finance steps to prevent home foreclosure

1. Create a budget

The first and simplest step everyone should take to prevent home foreclosure is to prepare a budget. Financial solvency is as simple as making and saving more money than you spend.

Take an inventory of your liabilities and assets. If you don't like what you see improving your financial situation could be as easy as getting a second part-time job and saving your extra wages, going back to school and developing new technical skills, or selling something of value and generating more savings.

2. Decrease your expenses

Not only is generating more income important to improving your financial situation, it's also important to decrease your living expenses. The good news is this may not be as difficult as you think. Most consumers can cut $100-200 dollars from their budgets each month simply by making some small changes: eliminating the gym membership, cancelling Netflix and cable, or deciding to eat at home.

Take that extra two to four hundred dollars and pay down your credit card debt or deposit it into your emergency savings, something which we'll discuss next.

3. Develop an emergency saving account

An emergency fund eliminates an individual's decision whether to buy food, pay their mortgage, or get medical care if faced with a financial crisis. Financial planners recommend Americans maintain an emergency fund which allows them to pay for all of their financial commitments for at least six months, assuming their income source was eliminated.

An emergency fund is especially critical for homeowners who have large mortgage payments and who could face foreclosure in as little as three months for failing to make payments.

4. Buy insurance and protect your assets

A necessary step to avoid foreclosure that many overlook is buying the proper insurance. Homeowner's insurance, car insurance, and health insurance can ensure that you and your family are protected.

For example, if you have purchased a substantial life insurance policy for your spouse and they unexpectedly die, instead of possible facing a home foreclosure or having to file for bankruptcy protection, you will have the resources necessary to support yourself.

5. Don't buy more home than you can afford

Before purchasing a home a borrower should make sure they have the resources and income to pay for the house. If you have created a proper budget you should have a good idea of how much you can afford to spend on a house payment each month. Overspend and fail to have an emergency savings plan and you could be facing foreclosure if you become severely ill, lose your job, or face divorce.

6. Don't pull equity out of your home

A few years ago it was common for homeowners to take money out of their homes and use the extra cash to buy cars, furniture, or complete home renovations. This is great when the home market is booming, but what happens when the market goes bust and you failed to protect your most valuable asset? If this happens it is likely your home mortgage is more than the market value of your home, which means you will not be able to sell your house, if needed, and repay the lender.

Financial crisis: the first steps

If you are facing a financial crisis it is imperative you immediately contact your lender. Do not ignore their calls or letters. Find out if they are willing to negotiate a repayment plan or if there are other options to foreclosure such as a short sale, a deed in lieu of foreclosure, or a loan modification.

Can filing for bankruptcy protection save my house?

Filing bankruptcy may be a good option for some homeowners, but it may not save your house. In some cases bankruptcy only delays the foreclosure. Before filing bankruptcy make sure you understand what it can and cannot do for you.