What to Do If Your Mortgage Becomes Unaffordable

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The prospect of falling behind on mortgage payments is frightening for any homeowner. No one wants to scramble to come up with money that's past due while a mortgage servicer is calling and warning letters arrive in the mail. Add the uncertainty of whether you'll be able to get back on track, or whether you'll ultimately lose your home, and you have a recipe for an extremely stressful situation.

But financial setbacks can happen to anyone, so it's important to know what to do if your mortgage ever becomes unaffordable. In this guide, we'll cover how to handle being late on a payment and how to address long-term difficulties with paying your mortgage. We'll also go over the foreclosure timeline.

What if you're going to be late on a mortgage payment?

An isolated late payment usually isn't the end of the world, but you still want to tackle the problem right away.

If you can't make a mortgage payment on time, call your mortgage servicer. Let them know why you're going to be late and when they can expect the money.

Your mortgage servicer will tell you what consequences, if any, you're going to face for missing your due date. You may have a grace period of 15 days or so during which you can make a late payment without being charged a fee. But if you don't have a grace period or if that time goes by before you make the payment, you'll likely owe a penalty equal to somewhere between 3% and 6% of your monthly payment amount. 

Your mortgage servicer may report your late payment to the credit bureaus, although some servicers don't notify the credit bureaus until you're 30 days overdue. If your late payment does end up on your credit report, though, it can stay there for up to seven years and damage your credit score. 

Therefore, it's a good idea to check your credit regularly after a missed payment and see if there's anything you can do to boost your score, like improving your credit utilization ratio by paying down some debts.

You also want to be honest with yourself about whether this missed payment was truly a one-time occurrence or if it's going to happen again. If there's a chance you're going to struggle to make payments on time going forward, consider talking to a housing counselor or a credit counselor for help with finding a solution.

What if you'll have trouble paying your mortgage long-term?

If it looks like your mortgage is going to be unaffordable for some time to come — such as if you've lost your job — you'll need a plan to avoid foreclosure. 

First, call your mortgage servicer and tell them you are going to have trouble making payments. The sooner you communicate with them, the better, so don't wait until you miss a payment to reach out! They may ask you to complete an application to determine what kinds of assistance would be appropriate for you.

You should also make an appointment to talk to a housing counselor. A counselor can walk you through your options and help you decide on the best course of action to pursue. 

Here are some of the main alternatives that might be possible, depending on your circumstances.

Go into forbearance

If your lender agrees to it, forbearance gives you a temporary break from making your usual mortgage payments while you work to stabilize your finances. You might be asked to make lower payments during the forbearance period, or you might not have to make payments at all while your mortgage is in forbearance.

Your interest balance will keep growing during forbearance — this option doesn't hit pause on interest charges. And forbearance doesn't wipe out any of your loan. You'll still need to make up your skipped or reduced payments later. You might be allowed to make extra payments over time or to make a lump-sum payment when you sell your house or refinance your loan. Or, you might have to pay everything back at once as soon as you're out of forbearance.

Forbearance protects you from foreclosure, but it can still have a negative impact on your credit if your mortgage servicer reports it to the credit bureaus.

Forbearance is often helpful if you're dealing with a hardship that has an end date. For example, if your income is going to be lower for a few months while you recover from surgery, forbearance could allow you to skip a few mortgage payments while you're getting back on your feet.

Refinance your loan

Refinancing involves taking out a new mortgage and using it to pay off your current mortgage. Going forward, you make monthly payments on the new mortgage. If you can refinance with a loan that has lower monthly payments, it might be easier to fit the new payments into your budget.

You may be able to get lower monthly payments if you take out a new loan with a longer term so that payments are spread out over a larger number of years. And refinancing might give you a more affordable payment if interest rates have gone down since you took out your existing mortgage, or if your credit score has improved so that you qualify for a better rate.

You can expect to pay closing fees of 3% to 6% of the amount you still owe on your mortgage when you refinance. And if a prepayment penalty applies to your current mortgage, you'll have to pay that too.

Refinancing can make sense if you want a more affordable payment from here on out, provided you can afford the cost of refinancing and you have sufficient income and a high enough credit score to qualify for a new loan.

Modify your loan

With a loan modification, your mortgage company changes your loan to make it more affordable for you. You could get a longer loan term, part of your balance might be forgiven, or you could be given a lower interest rate to reduce your payments.

Loan modification is a big step, and not all mortgage servicers will agree to it. You might be more likely to get a loan modification if you can show that a permanent change in your situation has made your mortgage impossible to pay as it stands now. You'll probably have to rule out any alternatives, like refinancing, before a mortgage company will even consider modification.

Your credit will probably take a hit if you get a loan modification, but the fallout shouldn't be as bad as what you would experience with a foreclosure.

Loan modification may be the right choice for you if you're dealing with a crisis that your finances probably won't recover from, if your mortgage servicer is willing to change your loan, and if you'll definitely be able to make the new payments without a hitch.

Sell your home or surrender it to your lender

Finally, you could sell your home or return it to your lender with what's known as a deed-in-lieu-of foreclosure. These options require you to move.

You might be able to fully pay off your mortgage by selling, but if not, this is called a short sale. Depending on your state's laws, you might have to pay the difference or negotiate with your mortgage company to accept less than the full amount you owe. 

Similarly, if you decide to surrender your home and its value falls short of what you owe, you might be on the hook for the remaining balance in some states. But you can try to negotiate with your mortgage servicer to waive the deficiency.

Both a short sale and giving up your home can seriously hurt your credit, sometimes just as much as a foreclosure. But on the plus side, you have the opportunity to negotiate with your mortgage servicer, which could reduce the impact on your credit, and you might be able to get help with moving expenses.

Selling a home or getting a deed in-lieu-of foreclosure are typically a last resort. They could be the least-bad options if your income has fallen drastically and keeping your home isn't a realistic goal anymore.

At what point could you lose your home?

Ideally, you'll reach an agreement with your mortgage company or decide on an alternative like refinancing before your home is in immediate jeopardy. But if you aren't able to find a resolution or if you ignore the problem, you'll ultimately be subject to foreclosure.

Once you're 30 days late on a payment, you're considered in default. A mortgage servicer may start the foreclosure process at this point. Typically, they will try to work with you for at least three to six months before moving to foreclose, but if you don't respond to their calls and notices you can expect a much shorter timeline.

The rules for foreclosure differ by state, but in general there may be a few weeks to a couple months before a court date arrives. Then, if the judge determines that your home will be sold, that sale might be scheduled for as soon as a week or two out. In some cases, the foreclosure may not go through a court — instead, the mortgage company might post public notices for a specified number of weeks and schedule a sale itself.

In some states, the sale is the end of the foreclosure process, and you must leave the home or be evicted. Other states allow a redemption period, which could last a few months or more. During this period, you can get ownership of your home back if you pay a required amount, which could be the remaining balance on the mortgage or the amount the home was sold for, plus other costs. You might be allowed to continue living in the home until this period is up.

An unaffordable mortgage puts you in a vulnerable position, but you have a greater chance of successfully finding a way forward if you're in close contact with your mortgage servicer and if you cooperate with them. You should also be aware that there are a number of scams targeting people who are at risk of falling behind on a mortgage. To protect yourself, don't accept any offers of help without first consulting trusted sources like your housing counselor and attorney.

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