You took out a mortgage and could easily afford the payments. Now that some years have passed and your circumstances changed, you cannot afford the payment any longer. Don’t worry – it happens to thousands of people every year. Before you panic and assume you will lose your home, learn what options you have at your disposal.
Refinance Your Loan
If you haven’t officially missed any mortgage payments yet, you may be a good candidate for a mortgage refinance. This is a good option for those that lost a portion of their income, but are still working or borrowers that had to take a high interest rate at the time of buying their home. If rates are lower now, it could be a good time to refinance and get a lower payment.
It’s important that you take this step before you miss a payment, though. A late mortgage payment history could make it difficult to refinance. If you still have a job, but it’s hard to make your mortgage payments, keep making them on time and apply for a refinance.
You don’t have to keep the same lender; you can shop with any lender. You’ll want to find the lender with the lowest interest rate and best terms, considering your new financial situation. You don’t want to take a new loan that you can barely afford, though. Make sure it’s a viable option that will make it easy to afford your mortgage payment moving forward.
Request a Loan Modification
If you aren’t a good candidate for a standard refinance, consider a loan modification. You can go about this process with your current lender. Your lender may be able to lower your interest rate, extend your term, or reduce your principal balance. Each lender has their own requirements when determining if you are a good candidate for a loan modification.
Typically, this program is for borrowers that aren’t yet late on their payments, but can demonstrate financial difficulties in keeping up with the payments as well as the other costs of living. This option can help you avoid foreclosure while modifying your current loan.
Any changes made to your loan are permeant, so make sure you understand the terms and how they will affect you moving forward. This option is typically only available for primary residences and for borrowers that the mortgage payment exceeds 31% of their gross monthly income.
Try Applying for HARP
The Home Affordable Refinance Program is another option. This program is for homeowners that are current on their mortgage, but are upside down on it. In other words, they owe more than the home is worth. This makes these homeowners ineligible for any type of refinance program.
HARP is available from any lender participating in the program. You can start with your current lender, but you are not required to use them. You can apply for the program with any willing lender. As with any loan program, make sure you understand the terms of the loan and how they affect you now and in the future. This program is set to stop at the end of 2018, but rumor has it that another program is set to take its place.
Request a Repayment Plan
If you are already behind on your mortgage payments, you can request a repayment plan from your lender. The only way this will work is if you get in contact with your loan servicer as soon as you know you cannot afford your mortgage payment. If you wait until you miss three payments, you could be too late. A lender will be less willing to avoid foreclosure proceedings if you don’t stay in contact with them.
When you get in contact with your lender, be ready to share the reasons for your hardship. Did you lose your job? Did you fall ill? What were the circumstances that led up to the financial issues? The more details you can provide the lender, the more willing they may be to offer a solution.
A repayment plan allows you time to make up the missed payments. Basically, this is a plan to make up the payments you missed. If you call the lender ahead of time, you may be able to talk about a forbearance plan, which we discuss below. If you wait, don’t wait too long and have an amount in your mind that you can repay towards the missed payments each month. The more knowledgeable you are when you call the lender, the more success you may have in getting help.
If you know you are not going to be able to afford your mortgage payments, you can request a forbearance plan from the lender. This plan allows you to stop making payments for a predetermined period. You then agree to make up those payments in addition to your regular monthly payments after the forbearance period ends.
Of course, this only works if you can afford higher payments after your temporary relief period. If your situation is temporary, this could be a good option. It cuts you a break on your required mortgage payments for the time being, but allows you to stay in your home without the worry about getting behind on your payments.
Ask About a Short Sale
In some cases, the lender will allow a short sale. This means they will accept less than the amount of the outstanding mortgage and consider it paid-in-full. It’s most common for those that owe more than their home is worth and that cannot make their regular monthly payments due to a hardship.
While you still lose your home, so it’s similar to a foreclosure, you damage your credit less with this option. In a short sale, you don’t have a large series of late payments reporting on the credit report. That is usually what damages your credit scores the most. This isn’t to say a short sale doesn’t hurt your credit score, but its effect might be less damaging.
Give up Your Home in a Deed-in-Lieu-of-Foreclosure
The final option is to give up your home in a deed-in-lieu. As the name suggests, you voluntarily hand over the deed to your home rather than waiting for the lender to go through the foreclosure proceedings.
While the end result is the same – you lose your home, you do have a little more control in this situation. You aren’t on the bank’s timeline regarding when you have to exit the home. You can turn in the deed when you are ready. Of course, this option is only available if the lender agrees to it and it may have certain tax implications as well.
You have options if you cannot afford your mortgage payment any longer. Make sure you take the time to explore each of them. Talk with your lender, and most importantly, don’t wait until you are so far behind that the lender has no choice but to start foreclosure proceedings.