Financial hardship happens. In January 2019, 435,421 homes were in some stage of foreclosure in the United States. In the event of economic hardship, here’s what to do to avoid foreclosure if you can’t keep up with your mortgage payments.
First, What Happens If You’re Late On a Payment?
If you miss a payment on your mortgage, your lender reports the late payment. The late payment is called a delinquency on your credit report. The delinquency remains on your report for seven years. Even missing a single mortgage payment negatively affects your credit score. The longer you go without bringing the account current, the greater the impact on your credit score.
If payments stop altogether, the loan becomes delinquent and goes into default. The default status continues for roughly 90 days. At this point, the lender usually reaches out to the homeowner about the balance of the loan. If the homeowner cannot pay, the lender may file a Notice of Foreclosure and file foreclosure documents in court.
This part of the process usually takes 120 days to nine months to complete. The homeowner can challenge this process in court.
What To Do When You Can’t Make the Payments
- Act Fast: It’s hard to accept financial hardship when it happens. Denying your difficulties with money makes the situation worse. Luckily options are available to you. Time is of the essence when it comes to receiving support. Be proactive! When you wait to explore what could help you, you reduce the options that are available to you.
- Contact the Consumer Financial Protection Bureau: Talk to a housing counselor about your options. Their professional expertise is extremely valuable. It’s also comforting to get their support before approaching your lender.
- Contact Your Lender: Lenders want their money. But helping you keep your home is advantageous for them too. If the market is not strong, the lender stands to lose money when they repossess your home.
Prepare for your call with the following information:
- Why you can’t pay the mortgage. (Do you have any documents to backup your reason for falling behind?)
- How you have tried to resolve the problem.
- Whether the situation is temporary or not.
- Details about your income.
- Changes you foresee in your financial situation in the short and long term.
- Other financial issues that are stopping you from getting back on track.
- What you would you like to see happen. (Do you want to keep your home? What type of payment arrangement is feasible for you?)
- Keep notes of all communications with your lender. This includes the date and time of contact, the nature of the contact (face-to-face, phone, email, fax, or regular mail), the name of the representative, and the outcome.
- Follow up on any oral requests with a letter. Send your letter by certified mail, “return receipt requested,” which documents what the lender received. Keep copies of your letters and all enclosures.
- Meet all deadlines.
- Refinance: Refinancing your home is an option for some homeowners. This option is usually available if your credit is good. If your current loan has a high-interest rate, refinancing at a lower rate lowers your payments.Note: Refinancing often includes hefty fees for breaking your existing mortgage contract. Therefore it costs you more in interest over time. Refinancing is not usually an option for homeowners who have already overextended on their loan.
- Loan Modification: This option is when a homeowner works with a lender to change the terms of their mortgage. The change is either temporary or permanent. It can affect the mortgage rate, the term, and/or the monthly payment. This option is similar to refinancing. But it’s only open to homeowners who can prove they’re facing great financial hardship.
There are different types of loan modification. Not all programs have the same impact on your credit score. For example, some programs referred to as loan modification are actually debt settlement plans. Debt settlement (see below) has a more negative impact on your credit score.
- Debt Settlement: With debt settlement, the lender agrees to accept less than the full amount owed on the loan. As with any other type of debt, settling for less than what is owed reflects negatively on your credit report.
- Forbearance: If your financial hardship is temporary, the forbearance option gives you the option to temporarily reduce or even suspend your mortgage payments for a period of time. Of course, the decision to use this option is up to the lender.
- Rent Your Home: Most homeowners do not want to vacate their home. However, if it means being able to pay your mortgage, it’s not a bad option. Especially if the monthly rent you charge is more than your monthly mortgage payment.
Note: Before deciding to rent your home, know that your home will change from a primary residence to an investment property. This usually disqualifies you for any additional assistance from your lender. Also consider that you are responsible for things like home repairs, taxes, and insurance.
- Sell Your Home: Sometimes the best way to avoid foreclosure is to sell your home. For homeowners who are already making late mortgage payments, there are two key options:
- Short Sale: A short sale is when the bank agrees to let a homeowner sell the home for less than what is owed on the mortgage. It’s up to the lender to decide whether or not a short sale is in their best interest. If the lender doesn’t report the debt reduction to credit reporting agencies, a short sale is less damaging to your credit than a foreclosure.
- Deed in Lieu of Foreclosure: In some cases, a lender allows a struggling homeowner to sign their deed over to the bank instead of foreclosing. You essentially turn the home over to the lender. The lender then sells the home to recoup what they’re owed.
Note: Both Deed in Lieu of Foreclosure and Short Sale have tax implications. Consult a HUD-certified housing counselor as well as a tax professional to determine the full implications of these options.
- Declare Bankruptcy: Sometimes homeowners find themselves with no other choice but to declare bankruptcy. Bankruptcy has an extremely negative effect on your credit score. It makes it very hard to borrow money from a lender in the future. Personal bankruptcy can also affect your future employment options as many employers check candidates’ credit scores.
When an individual files Chapter 13 bankruptcy, it’s sometimes possible for them to keep their home. This is only an option if the homeowner has a solid plan to repay at least some of their debt. Unlike Chapter 7 bankruptcy, Chapter 13 requires that borrowers attempt to repay some of what they owe before the slate is wiped clean. Some homeowners in default stay in their homes for months or even years. Completing a foreclosure takes more than a year on average. If homeowners fight their eviction in court, they can stay even longer while the case works its way through the system.
- Protect Yourself from Scammers: Unfortunately, there are tons of scammers out there looking to take advantage of struggling homeowners. Some signs of scams include
- Unsolicited offers. Legitimate housing counselors do not send out solicitations.
- Promises that sound too good to be true.
- Upfront fees or requests for payments to be sent directly to them.