A mortgage is a long-term commitment, in many cases a 30-year commitment. A lot can happen in that time. You could lose a job, face a medical crisis or be hit with unanticipated expenses. There may come a time when paying your mortgage becomes a challenge. You may be faced with the possibility of missing payments and even foreclosure.
If you’re in this position, knowing your options and acting quickly can make the difference between losing your home and keeping it.
What Will Happen if You Don’t Pay?
If you miss a mortgage payment you will trigger a series of events:
- If your payment is 15 days late you will usually trigger a late fee.
- If your payment is 30 days late you will officially go into default. The overdue payment will be reported to the credit bureaus and your credit score can be affected.
- If you fail to make payments for 120 days your lender may begin foreclosure proceedings against you.
- Even if your home is foreclosed, you are not off the hook. If the lender sells the home for less than the balance you owe, you may be liable for what is called a “deficiency balance”. The lender may take legal action to reclaim that balance.
This process can have a serious impact on your life and your credit. If possible, you should try to avoid it.
Talk to Your Lender
As soon as you are under stress and having trouble making your payments, reach out to your lender. If possible, do this before you have a late payment on your record. The earlier the better.
Communicating with your lender establishes that you are a responsible borrower who is actively looking for a solution to a problem. You’re not running and hiding, you’re facing the issue and trying to fix it. That gives you credibility.
Depending on your situation, there are a number of possible solutions that you may be able to negotiate.
- Forbearance. Lenders may be willing to reduce or delay payments for a period of time, especially if you’re in financial distress due to illness or other events beyond your control.
- Loan Modification. Some lenders may be willing to change some of the terms of your mortgage to make it more affordable. They could extend the term of your loan, which would reduce your monthly payment, or lower your interest rate.
- Repayment Plans. A repayment plan is intended to help borrowers who have missed payments catch up without going into default. You’ll probably have to add a little extra to each monthly payment until the deficiency is made up. Don’t agree to a repayment plan if you won’t be able to make the payments!
- Refinancing. If your credit is good, you may be able to improve your loan terms. Refinancing at a lower interest rate or extending your loan term could lower your monthly payments. If your current lender is not willing to refinance, discuss it with other lenders.
Remember that your lender does not want to foreclose. They want to keep your loan in good standing and keep you paying off your debt. If you give them an acceptable option they are likely to accept it.
Before you speak to a lender you should take stock of your finances. Be prepared to discuss your income, your living expenses, your other debts, and the reasons why you are unable to make your mortgage payments. It may also help to be able to show that you are trying to raise your income or reduce other expenses.
Keep a record of all conversations with your lender. If you have a phone conversation, follow it up with a letter. Use certified mail, return receipt requested. Always explain your problems clearly and give details on what you are able to do and what solutions you’re seeking. Never ignore any communication from your lender.
Talk to a HUD-Approved Counselor
The Department of Housing and Urban Development (HUD) offer services to help home buyers and mortgage holders. HUD-approved housing counselors are specialists in handling mortgage problems and may be able to help you clarify your options and make the best choice for you. A HUD-approved counselor can help you in several important ways:
- Identify assistance programs and help you apply. There are many programs that help overburdened homeowners stay in their homes. They may be offered by government or private sources. Housing counselors will know what options you have and what help you’re qualified to receive.
- Review and explain any proposals made by your lender. Loan proposals or offers may be complex and challenging. A housing counselor can help you understand and evaluate any options that you’re offered.
- General financial advice. A housing counselor can assist you with budgeting and with resolving financial problems that limit your ability to make mortgage payments.
You may encounter companies or individuals that promise to save you from foreclosure. Many of these offers are scams.
If you notice any of the following signs, you might be looking at a scam:
- No HUD accreditation. The counseling service should be accredited by the Department of Housing and Urban Development (HUD). If you’re not sure, ask to see their accreditation documents.
- You’re asked to make upfront payments. Legitimate counselors will not ask you to pay upfront, and will explain clearly what your options are before suggesting any paid service.
- Promises or guarantees that your mortgage will be reduced or that you will not face foreclosure. Legitimate counselors explain options and possibilities. They won’t make promises or guarantees.
- Requests to sign over your home’s title or sign other documents. Scam artists may want you to sign over the title to your home or to sign other documents. They may offer to buy your home, then let you lease it and eventually buy it back. These offers are generally not legitimate.
- The company wants to do a “forensic audit” or asks you to stop making mortgage payments. Stopping your mortgage payments can harm your credit and accelerate foreclosure proceedings, and an “audit” may just expose your personal information to identity thieves.
- The company claims to be affiliated with government agencies. Some companies use names, logos, or other identifying features that imitate those of official agencies or may even claim to be associated with those agencies.
These scams can do a great deal of damage to the status of your mortgage and to your credit, so be sure that you are dealing with a reputable counselor. If you’re having trouble finding a qualified counselor in your area, contact local housing agencies or the Homeownership Preservation Foundation, a non-profit group that assists homeowners in financial distress.
If You Really Can’t Pay Your Mortgage
If you simply don’t have the resources to continue paying your mortgage there are options you can consider that may resolve the problem.
- Renting your home. If you can rent your home for enough to cover the mortgage payments, consider renting and moving to less expensive accommodation. Remember that landlords have responsibilities, and you’ll still be paying for maintenance, insurance, and taxes.
- Selling your home. If your home is worth more than you owe, selling it might be the most sensible plan. If you have substantial equity in your home you may be able to sell it, pay off your loan, and have enough left over to make a down payment on a more affordable alternative.
- Short sale. If you owe more than the home is worth, your lender may be willing to consider a short sale. They will accept whatever the sale of the house brings as payment. Your mortgage will be reported as “settled”, and your credit may be damaged as a result.
- Deed in lieu of foreclosure. If foreclosure seems inevitable, you can offer the lender the deed to your home in exchange for release from your mortgage. This gives the same result as foreclosure without the legal proceedings. This will have an impact on your credit but it may be less than the damage a full foreclosure could bring.
All of these options involve moving out of your home, but they avoid foreclosure, reduce the damage to your credit, and leave you in a better position to recover financially.
How to Avoid Mortgage Problems
Prevention is better than cure, and the best way to manage mortgage payment problems is to avoid the problems in the first place. Here’s what you can do.
- Don’t buy a home until you’re financially ready. You may wish to reduce your other debts and build a solid credit history before taking on a mortgage. Better credit will help you get a lower interest rate, and that will make your mortgage more affordable.
- Don’t purchase more house than you can afford. Many homeowners get into mortgage trouble because they’ve simply spent too much money. If you’re shopping for a home, set a budget that you’re sure you can afford. Be sure to consider the possibility of added expenses or reduced income. Stay within your budget.
- Make a substantial down payment. A down payment gives you equity in your home from the start, and reduces the possibility that you’ll end up owing more than your home is worth. Many lenders will offer lower interest rates to buyers who can make a substantial down payment.
If you’re starting to feel mortgage stress, look for ways to address it before it becomes critical. You may be able to take on more work, work more hours, or take on a sideline job. Reviewing your budget may reveal expenses that you can cut.
If you’re unable to pay your mortgage and facing the possibility of default, don’t panic. Take stock of your finances, communicate with your lender, and seek qualified counseling. You may be able to solve the problem and keep your home.
Even if it’s not possible to keep your home you may be able to avoid the pain and damage to your credit that goes with default and foreclosure. You may be able to resolve the problem in a way that protects your credit and puts you in a better position to buy a new home when your finances recover.