If you’re a homeowner, your mortgage is likely the largest and most important of your debts. Not being able to pay it could send you into panic mode. That’s because defaulting on your mortgage loan is a much more serious offense than skipping out on a credit card bill and ultimately, you could end up facing foreclosure if you fall too far behind.
When you find yourself in the middle of a financial meltdown because of a job loss or an unexpected illness that leaves you unable to work, you don’t want your monthly mortgage payment to become a source of anxiety. Taking action sooner rather than later is the best course if you’re worried about how you’re going to pay.
Ask Your Lender about a Grace Period
If you haven’t missed a mortgage payment yet but you’re not sure you’ll be able to pay next month’s note on time, don’t hesitate to call up your lender to review your loan terms as soon as possible. Depending on which bank you borrowed from, you may have an additional grace period to get your payment in beyond the actual due date.
The grace period begins the first day after the payment is late and it typically covers the two weeks following the due date. If you think you can get your payment in on time before the grace period expires, you may be able to avoid any late fees or service charges. Keep in mind, however, that once you hit the 30-day mark your lender can and likely will report a missed payment to the credit bureaus.
Consider Refinancing If You Have Good Credit
Refinancing can make your loan more affordable but you’ll need to act fast before you rack up a string of missed payments. The bank is going to look at your credit report and score when you apply for a refinance loan and even one black mark could translate to a denial.
As a general rule, you’ll need to have at least 20 percent equity built up in the home to refinance. If the main goal is bringing your payments down, opting for a longer loan term can reduce the monthly cost. The only catch is that if you don’t refinance again at some point in the future, you may end up paying significantly more in interest by the time the loan is paid off.
Here’s an example to give you an idea of how much refinancing can save you on a monthly basis. Karen has 20 years left on a $200,000 mortgage and her interest rate is 4.75 percent. Her monthly payment is right around $1,050 but after refinancing to a new 30-year loan at 3.75 percent, it drops to roughly $925.
She’ll be saving close more than $1,400 annually on the payment, which is a big help to her bottom line but that savings comes at a price. By stretching out the loan term, she’ll pay an additional $75,000 in interest if she doesn’t do a second refinance or apply extra payments to the principal.
See If a Forbearance Is Available
Depending on the lender that holds your mortgage, a temporary financial hardship may qualify you for a forbearance period on the loan. While it’s up to the individual lender to decide what the terms are, you may be able to get your payments lowered or suspended completely until your situation improves.
If you’re considering a forbearance, be prepared to provide proof of your income and expenses to the lender to demonstrate your hardship status. If you do get approved, you’ll need to make up the difference once the forbearance ends. The lender may set up a separate repayment plan, require you to make a one-time lump sum payment or just tack it on to the end of the loan.
A forbearance is usually a good option if your credit isn’t good enough to qualify for a refinance or you don’t have enough equity in the home. Because you and the lender agree to suspend the payments, your credit score doesn’t suffer, which is a definite plus when you can’t pay.
Look into a Loan Modification
In situations where a financial setback seems likely to stick around for awhile, modifying the terms of your loan is a more permanent solution. A loan modification involves restructuring the loan so that the monthly cost is more affordable. Depending on the lender and your individual situation, that may mean lowering the payment, reducing the interest rate, getting a portion of the principal forgiven, or a combination of all three.
To qualify for the federal Home Affordable Modification Program, you have to either be behind on your mortgage payments or be close to missing one. Only homeowners who took out their loans before January 1, 2009 can apply and you can’t owe more than $729,750 on the property. Separate modification programs are available for borrowers who took out FHA, USDA or VA loans to buy their homes.
When you apply for a modification, the lender will take a close look at your income and expenses along with any extenuating circumstances to determine whether you meet the standard for a financial hardship. If you get approved for the program, you have to stick to the terms that you and the lender agree on, otherwise, your modification could be cancelled.
If You’ve Run out of Options
When you’ve exhausted all of the different avenues for holding on to your home and you’re still not in a position to keep up with the payments, it may be time for drastic measures. Having a foreclosure on your credit can haunt you for years to come so if that’s even a remote possibility, it’s time to dig in and consider other options.
First, you could rent the property out. The two obvious downsides here are taking on the headaches of being a landlord and finding someplace else to live, but you shouldn’t count it out right away. If your new housing costs are substantially cheaper than your mortgage and the rent you’re charging is more than enough to cover the payment, that’s a win-win for your wallet.
Selling the home outright to eliminate the mortgage altogether is another possibility but that may not be doable if you’re underwater. In that scenario, asking the lender to agree to a short sale allows you to escape foreclosure. The biggest drawback of a short sale is that it does take a swipe at your credit, but it’s not as harmful as a foreclosure.
Finally, you could agree to a deed-in-lieu of foreclosure if you can’t get the lender to give a short sale the thumbs up. This basically means that you sign the property back over to the bank and they can then sell it to try and recoup some of the loss. That doesn’t mean, however, that you get to walk away scot-free.
The Mortgage Forgiveness Debt Relief Act allowed homeowners to exclude mortgage debt forgiven through a deed-in-lieu or short sale from their taxable income but the act expired at the end of 2014. Unless it’s retroactively reinstated, you could get stuck with a big tax bill if part of your loan balance is written off because of you gave up the home.
Watch out for Scams
If you’re desperate to get help with your mortgage, you need to keep a wary eye open for scammers who are all too willing to take advantage of your situation. Before you apply for a refinance loan or attempt a modification, do your homework to make sure the company you’re working with is legit. Remember, if something seems too good to be true, it probably is.
