Mortgage payments are likely the largest fixed expense most people have, so when dealing with a financial crisis that’s often the most challenging bill to keep up with. The best thing to do if you’re in danger of not being able to make your payment is to get in touch with your lender to see if there are hardship programs you might qualify for, such as a forbearance or loan modification. Or, you might ultimately decide to sell the home.
The worst thing you can do in this situation is to just stop paying your mortgage. Learn more about what happens if you fall behind on your mortgage, options for modifying your loan or getting payment relief, and other ways to avoid foreclosure if you are facing tough financial times.
The Consequences of Falling Behind on Mortgage Payments
If you stop making your mortgage payments, you can get into serious financial trouble. “First and foremost is the risk of losing your house to foreclosure if you fall too far behind,” said Matthew Hackett, operations manager at New York loan underwriter Equity Now. This can happen as soon as you miss three mortgage payments.
In the interim, there are also negative consequences for your credit score, since payment history is the biggest factor in the scoring models. Once you’re 30 or 60 days late, and that is added to your credit reports, it remains there for seven years. This will make it difficult to qualify for other credit and cause your credit score to drop.
For all of these reasons, you want to work with your lender as soon as there are signs of financial trouble.
[Read: Best Mortgage Lenders]
Get Educated About Your Options
As soon as you know that you are going to begin experiencing prolonged financial distress, get on the phone with your lender, says Mary Babinski, senior loan officer for Motto Mortgage Champions in Trinity, Florida. “You should not fear communicating with your lender. Be willing to get on the phone and talk through options.”
Because it’s also in your lender’s best interest that you avoid foreclosure, many have programs that can help you weather a temporary financial downturn. But most of them involve an application and underwriting process that can take up to 30 days, so you don’t want to delay reaching out, says Babinski.
If you want to do some research on your own first, the Department of Housing and Urban Development, or HUD, is another fantastic resource for counseling and foreclosure avoidance assistance. A HUD counselor can help you understand your options, and can also offer advice on budgeting, credit card debt and other financial problems that may be affecting your ability to pay your mortgage.
Before contacting your lender or HUD, you’ll want to gather your financial documents, much like you did when you purchased your home. This will include pay stubs, bank and investment account statements, tax returns and your mortgage information. You should also prepare a statement detailing your financial hardship.
Review Short- and Long-Term Solutions
It’s possible to work with your lender to find a new payment option that works for you. Consider the following four options that can keep you in your home for longer: refinancing, a forbearance agreement, a repayment plan or a loan modification.
Refinance
Refinancing your mortgage is an excellent option if you aren’t already stretched to the max financially, meaning your credit score and overall income are still strong. The best scenario is if you are able to earn a better interest rate and a more affordable monthly mortgage payment, but that can be more challenging in a rising rate environment, says Babinski.
Still, it doesn’t hurt to run the numbers on your particular mortgage to see if it’s worthwhile. If you have enough equity in your home, you may even qualify for a cash-out refinance loan to help pay off more expensive debt.
[Read: Best Mortgage Refinance Lenders.]
Forbearance Agreement
A mortgage forbearance agreement provides a solution to short-term financial issues. The agreement typically stipulates that the mortgage lender will not initiate foreclosure proceedings while you adhere to a plan to become current on your loan.
Lenders may agree to reduce or suspend payments during the specified forbearance period, but the borrower will ultimately be responsible for catching up on missed payments, including principal, interest, taxes and insurance.
“It’s a band-aid,” says Babinski, who warns that, in most cases, after the forbearance period is over the entire amount that you would have paid during that time becomes due. At that point, you’ll have to call the lender to see what other recourse you have.
Repayment Plan
If you’re already behind on your mortgage, you may be able to negotiate a repayment plan with your bank before going to foreclosure. With this approach, and your lender’s approval, your overdue amount plus your regular mortgage payments are spread across a specified period — usually three to six months — until you become current.
“The customer’s credit is reported as delinquent until the missed payments are re-paid in full,” notes Gary Miller, operations executive at Chase Home Lending.
[CALCULATE: Use Our Free Loan Calculator to Estimate Your Monthly Payments.]
Loan Modification
If your situation is more serious, a mortgage loan modification may be in order. A loan modification entails working with your current lender to permanently restructure your existing mortgage to create a more affordable payment. This can include changes to the interest rate, switching from a variable rate to a fixed rate or extending the length of the loan term to reduce the monthly total.
“Maturity terms may have to be extended up to 40 years to reduce the monthly payment,” says Miller.
Loan modifications are usually only available to those who can prove they’re experiencing a significant hardship, and borrowers must submit financial documentation and complete a trial period to qualify.
Leaving Your Home
If you find that your situation makes leaving your home unavoidable, there are essentially three ways to do so: a regular sale, a short sale or a deed in lieu of foreclosure.
Regular Sale
If you’re not yet behind on your mortgage and your home is worth more than what you owe, you can list your property for sale as you normally would.
“Due to the sharp increase in home values over the past several years, many customers have significant equity in their homes which makes a full sale a viable option,” says Miller.
You will need to keep up with mortgage payments until the sale is final, however.
Short Sale
If you are behind or underwater on your mortgage — meaning the value of your home is less than the total due on your loan — you may need to enter a short sale. In this scenario, the lender agrees to let the borrower sell the property for less than what is owed. “Just know that you’re not going to walk away with any money,” says Babinski.
The bank will lose money in the process, but for many lenders a short sale in which they recoup the majority of their dollars is preferable to a foreclosure. For the seller, the primary advantage is that short sales do less damage to credit reports than foreclosures. And, you can stay in the home until the transaction closes.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is a last-resort option for borrowers unable to fulfill the terms of their home loan through other means. In this scenario, you essentially hand over the property deed to your lender and are released from all obligations of the mortgage.
While you’ll relinquish your home and any value associated with it, a deed in lieu of foreclosure allows all parties to avoid the lengthy and expensive foreclosure process. Also, a deed in lieu of foreclosure is typically a far more private, and therefore less embarrassing, option for the homeowner.
Look into Community and County Programs
Check with city or local housing authorities in your county to see if there are any hardship programs for homeowners, suggests Babinski. For example, the Homeowner Assistance Fund helps homeowners with housing costs if they were financially impacted by COVID-19, and it’s still available in some states.
Counties, state-funded programs and even local church groups may be able to offer some help, says Babinski, but it’s on you to figure that out.
Falling short on your mortgage can be a crushing emotional blow, but by confronting the situation early and surveying your options you’ll be able to make the right decisions for your home, your family and your finances.
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Can’t Make Your Mortgage Payments? Here Are Your Optionsoriginally appeared on usnews.com
Update 10/24/23: This story was published at an earlier date and has been updated with new information.
