Handling Missed Mortgage Payments
Handling Missed Mortgage Payments
Hardships are unfortunately a fact of life that happens to everyone. Financial hardships can be especially challenging, especially when they are multiplied by making it more difficult to pay your mortgage payment. One late payment can negatively impact your credit score, and even if you can get back on track, there will be late fees. If you miss multiple payments, you may face foreclosure by your lender or other negative consequences. Fortunately, there are ways to move forward from financial difficulties regarding your home payment that don’t involve foreclosure.
Use this guide to learn more about what to do when if you begin to fall behind on mortgage payments:
Mortgages are the main concern of many average Americans who have to worry about whether or not they are going to be able to make their house payment. A significant portion of families live paycheck-to-paycheck without significant savings set aside, so one hardship can cause them to struggle to meet payments. This is a very common situation that can be multiplied by factors such as a bad economy.
Hardships are not rare. Struggles such as injuries, death in their family, divorce, and job layoffs can all cause financial difficulties. Even positive events like welcoming a baby into a family can lead to increasingly tight budgets due to the additional expenses which are often multiplied by reduced income of one or both parents. Thankfully, there are many options that can put you back on the path to getting your mortgage current if you act quickly.
What options do I have if I can’t avoid missing mortgage payments?
If you cannot avoid missed payments, then there are multiple options available to prevent foreclosure, which leads to many additional issues such as finding a new place to live, making it more difficult to buy a home in the future, and significantly lowering your credit score. Foreclosure can lower your credit score by more than 100 points and take seven years to completely recover from. Alternatives to missing mortgage payments can allow the homeowner to catch up with their payments again, or they can allow the homeowner to sell the house with a less negative impact. Here are some of the possible options:
- Catch up on payments: There are many ways to become current with your mortgage payments and any late fees that have accrued, but remember that the longer you wait to take action, the more it will cost you. Consider selling personal items with significant value, such as an extra vehicle. Think about liquidating savings if the loss outweighs the benefit. Lastly, if your household is suffering from a disorganization problem rather than a financial problem, set up auto-pay, so you don’t fall behind on payments due to oversight.
- Forbearance: Most of the time, it is in the mortgage company’s best interest to help borrowers succeed in fulfilling the terms of their agreement. Therefore, they may agree to suspend their right to pursue foreclosure as long as the terms of the forbearance allow the borrower to become current within an acceptable amount of time. Forbearances are typically for short-term hardships, as the costs to get current can build up quickly. However, a mortgage company may extend it for extenuating circumstances. The mortgage company may also agree to not report this so it will not affect your credit.
- Loan modification: Loan modifications are a re-negotiation of the terms of the loan in order to make them affordable to the borrower. This is not loan forgiveness, and if payments are lowered or temporarily forgiven, they will be paid through re-negotiated terms such as an extended term which may cost you many thousands more in interest over the course of the loan. There are many types of loan modifications, and mortgage companies generally have the ability to manipulate the agreement however you both see fit. However, the loan modification process has been subject to multiple scam operations, so you must do your due diligence. Loan modifications will only impact your credit based on how they are reported, and they have the potential to show up as a paid off loan coupled with a new loan, which may have no impact.
- Home Equity Loan: Technically, you may be able to get a second mortgage, or a home equity loan, to pay off your first mortgage. However, you must have good credit, and people who are suffering financial hardships are not likely to qualify. This is not generally a subject suited to falling behind on mortgage payments. If it is a possibility, homeowners must make sure to not overextend themselves and make sure they have a fixed rate. During a financial hardship, accruing more debt is not recommended, but it may be a unique possibility.
- Sell the Home: If you know you are going to end up selling your home, and you are behind on a payment or two, you may want to consider selling it immediately. Those late payments and fees will be taken off of any profit, so the more of them there are, the less money you’ll make. Still, it is better to break even than to go into foreclosure.
- Short Sale: A short sale is selling your home for less than you owe. Fore example, if you owe $250,000, but the home is only currently valued at $175,000, a mortgage company may be willing to let you sell rather than pursue foreclosure. Banks try to avoid foreclosure whenever they can make more than foreclosure would cost, so they may even forgive the rest of the debt. This is often a good option for homeowners because it has far fewer negative consequences than foreclosure.
- Foreclosure: A final option when you are behind on mortgage payments is foreclosure, which is the repossession of your home by the mortgage company. Foreclosure laws differ state-by-state, and they can take anywhere from a few months to over a year. You do not have to leave your home until the foreclosure is complete. This route is the most damaging to your credit score, and it can take seven years to recover. Generally, people are not able to secure home loans for five to seven years after experiencing a foreclosure.
There are many options available for the homeowner who is going to miss payments. Much of the decision-making process will have to do with whether or not you can become current with your payments and how much equity you have in the home. Equity may make certain options available, but it may make some options less favorable, as you could lose your equity with no benefit gained. Talk to your mortgage company or mortgage counselor to find the best option for your current and future financial situations.
5 ways to prepare for missing mortgage payments
Most hardships are unplanned, but some are expected and can lead to a situation where preparing for the loss of income is possible. In some cases, a person may know that his or her employment is going to be terminated. Maybe a situation arises where you know you are going to have to resign. Illnesses or other health conditions can also cause a foreseeable financial hardship. In these situations, it is important to prepare yourself to avoid more serious consequences.
1. Emergency Fund: Ideally, you should have money equal to the amount of a few months of bills put away for a rainy day. Building an emergency fund as soon as possible prepares for unexpected hardships. Even if you are expecting hardship in the next month or two, any savings helps.
2. Refinance: If refinancing could lower your payments, do it before a hardship happens where you may not qualify. During the refinance, you may have a month or two where the payment is delayed, and this can contribute to emergency funds.
3. Home Equity Loan: This is typically not the best option because it involves taking on more debt, but if the financial situation fits, you have a better chance getting this loan prior to a damaging financial hit.
4. Mortgage Unemployment Insurance: This is insurance that will cover your mortgage if you are involuntarily dismissed from your job. That does not include quitting or retiring. The cost of this insurance must be weighed against the benefits.
5. Be Proactive: The last way to prepare for missing mortgage payments is to keep a positive attitude and be proactive. Delaying possible solutions leads to having fewer available options and can lead to foreclosure. Instead, talk to your mortgage company, realtor, or a mortgage counselor to find out what your options are. Talk to a financial advisor to ensure you have enough savings to handle a hardship. There are plenty of resources to help you prepare and manage financial hardships.
If you are a procrastinator, preparation may not be your usual way to operate, but it should be when it comes to a mortgage. If you know you are not the type to prepare, rely on the experts to pave the way for your success. To find a HUD-approved mortgage counselor, click here.
After your first missed mortgage payment
Most mortgages have a grace period if you miss a payment. It is usually 15 days, and homeowners have up until that time to have their payment considered late or owe late fees. If you are going to be past that date, call your mortgage company. You may be able to prevent them from reporting your late payment. The worst thing you can do is nothing.
If you are late, and there’s no getting out of it, you’ll likely have a late fee. This is where a hard look at your financial situation needs to occur. Are you in need of organization? Do you need to consider loan modification or selling the home? The more quickly you understand your situation, the more options you’ll have.
It is important to understand that one missed payment usually affects your credit score more than the next missed payment. You may be thinking that it’s no big deal to miss one payment, but it can greatly hurt your credit score. Second and third missed payments will additionally hurt credit, but the biggest blow happens with the first delinquent payment. People with great credit suffer the worst credit hits.
Banks usually don’t start thinking about foreclosure until you are 3-6 payments behind, and during this time you can consider your other options. You may want to sell your home if you think you are so behind you cannot get current. However, loan modifications may be an option that allows you to get current without coming up with a huge lump sum payment.
After several missed mortgage payments
When you get to the point where you’ve missed several mortgage payments, you need to take action right away. It is very difficult at this point to make up payments because the late fees will also be due, but if selling other assets makes this doable, it may be a good option.
If you don’t have any savings or anything to sell, then you may need to apply for forbearance, sell the home as soon as possible, or look into a loan modification. These options are possibilities with certain mortgage companies, but the sooner you begin the process, the better.
Lastly, remember to be proactive. If you are already behind on multiple payments, then this is an important reminder not to hide from financial problems which will only make it worse. Remember that your mortgage company usually does not prefer foreclosure, so they may be willing to open doors to retaining your home ownership status. The only way you can guarantee foreclosure is to fail to act, so do not let fear or embarrassment make a bad situation worse.
How can I prevent losing my home to foreclosure?
It may seem like everything is lost once a foreclosure starts, but that is not the case. Foreclosures cost mortgage companies a lot of time and money, and they would prefer to make things work with you in most cases. Especially in the case of a unique financial hardship, they may be willing to let you short sale your home, meaning sell it for less than you owe. Often, they forgive the remaining debt because it is still better for them than foreclosure.
Foreclosure is a lose-lose situation for both the borrower and the lender, and it is simply the lender trying to recoup some of the loss on investment. It costs mortgage companies money, and it negatively impacts borrowers’ credit scores for nearly a decade.
That is why the biggest way to prevent losing your home to foreclosure is to communicate. Talk to your mortgage company, real estate broker, mortgage counselor, or financial advisor to form you best plan of attack and avoid foreclosure.
Contact us today for help.
Real Estate by Design is a client-centered real estate brokerage out of Boise, Idaho. Their skilled real estate agents know how to help struggling clients with their current and future mortgages. William Lowery is a Certified Default Advocate who is equipped with the knowledge and experience to help you find the best mortgage options during your financial hardship. Contact him here today if you have fallen behind on your payments or want to prepare for an upcoming change in income.