What If I Can’t Pay My Mortgage?

January 31, 2017

Recently, I received a call from a friend that was laid off a few months ago. She was worried that it was taking longer than she thought to find permanent employment and she was not sure how long her savings would last. She was concerned about not being able to pay her mortgage and was looking for options. My guidance for her was to do the following:

First, contact your mortgage lender ASAP. Even if you are current, contact your lender to let them know you may have a problem in the future. The earlier you contact them, the more likely they are to work with you and the more programs you may be eligible for.

Assess your situation. Most options will involve assessing your current finances to determine your ability to pay your mortgage now and in the future as well as a written reason why you cannot pay your mortgage. Create a budget and assess what you can afford to pay.

Then review your budget for areas where you can cut back. Shelter is essential, so if you are current on your credit cards and late on your mortgage, consider focusing on your mortgage. Ideally, your home expenses (mortgage, HOA dues, etc.)  should not take up more than 25%-35% of your take home income.

In my friend’s case, her situation was temporary and her mortgage was affordable. She had savings and could always do contract work if she could not find a permanent full-time job. If your financial situation is temporary and you will be able to pay your mortgage plus catch up on overdue payments in the future, consider the following options:

  • Forbearance.  A forbearance temporarily reduces or suspends your mortgage payments for a set period of time. Keep in mind that once your forbearance period ends, you are expected to set up a plan to get current on your mortgage, which means paying both your current mortgage and overdue payments.
  • Repayment. If you can make your current mortgage payment but struggle to repay overdue payments, a repayment plan may be an option. A repayment allows you to spread your past due amounts over a period of time.

If your financial situation is long term or you will have difficulty, making payments to get your mortgage current consider the following options if you want to stay in your home:

  • Modifying your loan. Your lender agrees to change the terms of the loan to make the payments affordable. The changes may involve changing the interest rate, the length of the loan, or the payment amount or adding past due amounts to your mortgage principal.
  • Refinancing. If you are current on your mortgage and have equity in your home, you may qualify to refinance your home. You get a new mortgage with interest rates and terms that may lower your payments. Even if you do not have enough equity in your home, you still may qualify for refinancing under the government’s Home Afforable Refinance Program (HARP).

If you if find that even with a modification you may not be able to afford the mortgage payment or you are ready to leave your home consider the following options:

  • Deed-in-Lieu. Also called a mortgage release, a deed-in-lieu is an option where your lender agrees to let you voluntarily transfer the property title to them in exchange for being released from your mortgage obligation. This option can negatively impact your credit score.
  • Short Sale. Sometimes known as a “pre-foreclosure” sale, a short sale is when your lender agrees to let you sell your home for less than your mortgage balance. This option may be a consideration if  you do not  qualify for a refinance or modification and your home is worth less than the mortgage. This option can also negatively impact your credit score.
  • Renting.  Depending on your location, you may be able to rent your home until you are ready to sell or your financial situation has improved enough to where you can afford the payments. Websites like Zillow can give you a gauge as to how much you may be able to get in rental income.

As you can see, there are a lot of options. The most important thing is to keep the lines of communication with your lender open. The earlier you contact them, even if you are current, the more options they may have for you and the more likely they are to work with you.