How can you take control of your finances when you have trouble paying your mortgage? Don’t panic, and don’t procrastinate. These will only make the situation worse. Instead, begin working on these two action plans:
- Contact your mortgage lender
- Contact a professional HUD-approved housing counseling agency
Facing the situation is the first step to finding a solution. Also, it is important to realize that there may be no good solutions. When you start looking for help when you first realize you have a problem, you will find many organizations that can help.
Don’t be afraid to call your lender as soon as you know you are having trouble. Your lender wants to earn money on interest from your loan, and they do not want to invest in real estate. Furthermore, they will not carry bad loans on their books, because it is very bad for their business.1
- Your lender does not want to foreclose on your house
- They do not want to have to sell your home
- Lenders can’t carry bad loans on their books
With all of that said, the best solution for them, and for you, is to find a way to keep your loan solvent. They want to find a way for you to keep paying on time. If they can’t find a way to keep you current, they want to get out of the loan while limiting their losses as much as possible.
One way that lenders help borrowers who have fallen behind on their mortgage is by offering a forbearance. You may be asking what is this? A forbearance is a reduction or suspension of payments for a specified time period. Why would they do this for you?
- A forbearance keeps your payments current
- Extending help to you is good public relations for the bank
Banks will not always offer a forbearance. When you ask for this help you need to show that you have a real financial crisis. In other words, show the bank that you lost your job, or had a family illness, or had some other serious, unforeseen problem. They will be less likely to help if you just got into trouble by overspending or did not save for things like a college education. Remember that your lender does not want to allow you to skip a payment, but if you are behind, they will usually be reasonable.
When you have a hard time making your payments, your lender will prefer to refinance. They will make money on the fees associated with the new loan, and they will probably extend the life of your loan. With that said, there are good reasons to refinance your home under certain conditions. You may:
- Get a much lower interest rate
- Have a lower monthly payment
- May be able to extend the life of the loan to lower your monthly payment
Refinancing is only an option when you still have good credit. Homeowners who already missed payments or have damaged credit in other ways can’t refinance. Also, make sure that you can make the new payment. It won’t do you any good to refinance your house if you won’t be able to make the new payment. In this situation you will need to look for another solution.
Loan modification programs help people who have already missed payments or damaged their credit. It will further damage credit, so be careful going this route.
- Different programs will impact your credit in different ways
- Many people get confused about the difference between a loan modification and a debt settlement
A loan modification will change the terms of you loan. Your lender is not going to refinance your loan, but they will alter the terms of your existing mortgage. You should opt for this only when you can’t refinance, because it will damage your credit.
A debt settlement is a plan where your mortgage company accepts less money than the full amount owed if you can’t pay your mortgage. A loan modification may or may not be a debt settlement, because under a loan modification you may still be paying the full amount of the loan.
- A debt settlement will greatly damage your credit
- Debt settlements always mean the bank is getting less money
- Banks never want to do this unless there is no alternative
Banks never want to accept less money than the contract, so when asking for a debt settlement from your bank make sure you thoroughly document your hardship. Also, keep in mind that your bank may choose to foreclose if the terms of the settlement are worse than the prospects of possessing the property.
Repayment plans are a good option if already behind on your payments, so it is still not too late to go to your bank and ask for help.
- Remember that lenders don’t want your house, they want your monthly payments
- If it makes more sense to offer a repayment plan than foreclose, they will do it
If behind on your payments and can document your hardship and how you will catch up on your payments, then immediately go to your lender for help. Waiting will only make your situation worse.
Selling Your Home
Selling your home if you can’t afford your mortgage is an emotional decision. In fact, it is the main reason that people don’t act immediately when they realize they are in trouble. However, if you need to sell your house to limit the financial damage then you should make the decision. You need to sell your house if you:
- Know you won’t be able to make payments
- Can avoid bankruptcy
- Can preserve your credit
It is always an emotional decision to sell, but you may need to do it to make a new start. In this situation you should talk to an advisor. A good place to start is to go to a HUD
Renting Your Home
Renting your house or a room may be a good option if you are behind on your mortgage. Renting will provide an income stream for you. In fact, it may be enough to make your payments if you rent your whole house.
- Make repairs or upgrades
- You will lose some privacy if you rent a room or part of your home
- Move if you decide to rent the entire house
There are risks associated with renting your house. Your tenant may damage your property. Also, they may get in financial trouble and not pay their rent. Therefore, while this may seem like a good solution you should weigh all your options before you decide to rent part or all your property.
If delinquent on your payments, then a short sale may be your only option. Your lender will agree to a short sale if you owe more than the home is worth.
- The bank agrees to sell the house for the market price, which is less than you owe
- Your credit will be greatly damaged
A short sale is a final option. You should try all possibilities before you do this. Your bank will also want to find another option before they do this because they do not want to lose money.
Deed In Lieu of Foreclosure
Another option if you can’t pay your mortgage is giving your bank your home’s deed in lieu of foreclosure. This option is similar with a short sale for you. While giving the bank your deed is better than walking away from your mortgage it will still damage your credit.
Another place you should start looking for help when behind on payments is housing counseling agencies. HUD approved housing counselors will help you understand your options. Together with your lender, counselors can help you make the best decision about what to do with your property.2
- They provide no-cost assistance to figure out your options
- Counselors are trained to help you fill out paperwork that you need to get help
They can show you government programs, such as the Home Affordable Refinance Program (HARP) and Hom Affordable Modification Program (HAMP). They can also help you with other programs, such as eligibility for short-term unemployment assistance, programs for single mothers, and veterans’ programs.
If you are having trouble paying your mortgage, the most important thing for you to do is act by explaining your situation with your lender and calling a HUD-approved housing counselor. Waiting will only make your situation worse. Alternatively, acting now will only help your situation. Since the only legal way to get out of your mortgage is to sell your home, you should consider all your options.