What to Do If You Cannot Pay Your Mortgage
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If you ever find yourself in a position where you are not able to cover the monthly mortgage payments, you must act quickly. A delayed mortgage payment or a missed payment will cost you in fees or penalties and the mortgage lender will also report the same to the credit bureaus. It will lead to a negative remark on the credit report, which will be there for seven long years. Even a single missed payment can lead to a drop in your credit score, and successive missed payments will have a cumulative impact. If you miss three mortgage payments consistently, it could push the lender to start the foreclosure process.
Missing a mortgage payment is different from falling behind on the rent since it will have a larger impact on your credit score and also put the home in jeopardy. But you have options allowing you time to think and work things out.
If you are worried, you might miss your mortgage payment, consider one or more options discussed below to avoid the pain, expense, and negative consequences. You will have to choose the next step based on your financial situation and whether you expect the challenges to be short-term or indefinite.
In this article
What happens first when you fall behind on the mortgage?
Once you fall behind on your mortgage payments, you will have to pay a late fee if you have delayed the payment for the first time for 15 days after your due date. The loan will default if you cannot make the payment after 30 days. Usually, there is a grace period for the monthly payments and you have till the 15th of the month to pay without incurring penalties or late fees. At this time, however, the lender will report the default to credit bureaus.
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What to do if you cannot pay the mortgage
Homeowners need to be aware of their options if they cannot make mortgage payments. If you are going through financial hardship and cannot pay the mortgage, you need to contact the mortgage company immediately and check if there are programs that could help. There are chances that you’d qualify for a refinance or a reduced payment based on where your home is. That said, consider meeting the HUD housing counselor to choose the ideal course of action and assist you with budgeting. Your options include:
Renting your home
Before considering mortgage modification or forbearance, check if you can move in with your friends and family. You can rent out your home and collect enough rent to manage the mortgage payments if possible. But you will pay a higher property insurance cost on your home. You will also be responsible for the repair and maintenance of the home. You will have to continue paying the mortgage while you set up the rental, and if you opt for foreclosure once you rent out the home, the tenants can also sue you.
Refinancing
When you have good credit, applying for a new mortgage with lower monthly payments will make it affordable to pay your mortgage on time. Refinancing will only work well for you if you have a minimum of 20% home equity. This way, you do not need to buy mortgage insurance, and you can get a fresh loan at a lower interest rate than your current loan.
Remember that the process could take months, and you will need to pay the origination fees associated with your loan. If you miss payments on the current loan, it will hurt your credit score and reduce the chances of mortgage approval for the new loan.
Forbearance
Mortgage forbearance is short-term mortgage assistance. If you cannot pay the mortgage due to a temporary financial hardship, you can ask your lender for mortgage forbearance. This will reduce or even suspend the tenure payments as long as 12 months until you can resume the payments.
Once you are granted forbearance, the lender will agree to refrain from foreclosure in the forbearance period, but you will have to repay the payments that were suspended in that time. You can pay in a lump sum or through a repayment plan. Whether you are paying a lower amount or not making any payments, the interest will continue to accrue through forbearance. Before entering into forbearance, you should understand the repayment options, which usually include paying a higher monthly amount for a certain period of time or paying the entire amount at the end of the forbearance term.
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Loan modification
Through a mortgage modification process, a mortgage lender will permanently adjust the loan terms and make the payments manageable for you. It could be an extension of the loan by a few payments or months, but it could cost you more interest payments than it did earlier.
This could be a worthy option if you want to keep the home and can afford a higher interest payment. No lender is under an obligation to accept a mortgage modification, and they only do so for borrowers who have a strong credit score and can manage the payments as per the new terms.
Home sale
When your home costs more than you owe, selling it can help make the most of it when you are in deep financial trouble. A home in fairly good condition could sell quickly. However, you must remember that the mortgage payments you missed during the sale could impact your credit scores and reports. It helps to keep up with the payments while you try to sell the home.
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Short sale
In a , your lender will allow you to sell the home and will accept the home amount in exchange for loan settlement. It will appear as a negative remark on the credit report and could bring down your credit score. But it will cause less harm to the credit report than a foreclosure. It will also save you from paying a deficiency judgment which is a sort of penalty given to the lenders if the collateral on the loan is lower than the amount of debt outstanding.
Deed in lieu of foreclosure
If you opt for a deed in lieu of foreclosure, it will require you to vacate your home and hand over the keys to the lender so that the lender releases you from the mortgage obligations. It could be less time-consuming and costly compared to the foreclosure procedure and could also have a “cash for keys” agreement which leaves you with some money to pay for your new place. It will also hurt your credit. However, it will be less extreme than that of foreclosure.
Foreclosure
A process will begin when you are more than 120 days past the due date, and this is when your lender will take possession of your home and remove you from the property. The lender aims to sell the property and use the funds to pay off the remaining balance. However, you could still be required to pay the difference if the proceeds from the sale do not cover the outstanding loan balance.
Tips to avoid falling behind
If your problem is temporary, working a few extra shifts and taking up temporary jobs will help you stay home. But, before buying a home, be sure you are financially ready. Here are a few tips to help you.
Make a higher down payment. When you make a larger down payment, you build equity in the home from the first day, and it will prevent you from owning more than your home’s value.
Pay your debts. This might be easier said than done, but it helps to pay down student loans, credit cards, and other debts before you buy a home. This will make home payments easier on your wallet.
Buy what you can afford. You might be tempted to go over budget regarding the home but do not stretch yourself too much. You could get in trouble in an emergency or if your income changes. Hence, before applying for a mortgage, work out the numbers and look for homes that you can afford.
Watch out for relief scams
Scammers often target people going through a difficult financial situation and are worried about defaulting on their mortgage. You must be wary and watch out for scams. If you come across deals too good to be true, avoid them. Benefit programs will never ask you for money, and always thoroughly check the website domain before contacting them. Only speak to a counselor approved by the U.S. Department of Housing and Development. They offer free advice to help you understand your options better.
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FAQs
When should I inform the mortgage company if I cannot make the payments?
You should not wait at all and contact the company right away if you know you are going to be more than 15 days late. Explain your financial situation to the lender and let them know what is going on. The sooner you do it, the more options you have.
How many times can you miss a mortgage?
The lender will begin a foreclosure procedure if you miss four consecutive mortgage payments. The timing could vary but it is usually 120 days after the due date.
Is deferring mortgage payments a good idea?
Deferring payments will not have an impact on your credit score but it is advisable to get a green light from the lender before you pause your payments.
Is there a government mortgage relief program?
There is a Homeowner Assistance Fund that helps eligible homeowners who need mortgage relief. Speak to your lender to check your HAF eligibility.
The bottom line
Being unable to pay the mortgage is never a pleasant situation, nor are any alternatives listed here. While some require you to sell your home, many others could damage your credit, but if you are in a financial crunch, this is the best you can do to reduce the damage while also choosing an option that leaves you in the right place to start again.
Being proactive will help avoid bankruptcy or foreclosure and could take you closer to getting your finances in place.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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