People fall behind on their mortgages for reasons beyond their control. What is in your control, though, is how you react and what you’re doing about the situation. There are steps you can take and resources that can help you get back on track financially. This article will cover what help is available for homeowners who are falling behind on their mortgage payments.
Written by Attorney Eric Hansen.
Updated July 26, 2021
People fall behind on their mortgages for reasons beyond their control. Perhaps you have fallen behind because you lost your job or you have been adversely affected by the coronavirus pandemic. What is in your control, though, is how you react and what you’re doing about the situation. Although it may be tempting, ignoring your growing mortgage loan debt will make things worse.
If you’re behind on your mortgage payments, know that you’re not alone. A new report from the Consumer Financial Protection Bureau found that as of March 2021, 2.2 million American homeowners were more than three months behind on their mortgage payments. There are steps you can take and resources that can help you get back on track financially. This article will cover what help is available for homeowners who are falling behind on their mortgage payments.
Help for Homeowners Who Fall Behind on Their Mortgage Payments
Ignoring missed mortgage payments will make things worse and can lead to foreclosure. Foreclosure can be a painful and stressful legal process for homeowners. Ultimately it means that the lender can take away the home, kick out the homeowner, and try to recoup as much of the loan as possible, with penalties and fees attached. Foreclosure will drastically affect your financial health including your credit score, your ability to get a new loan or a credit card moving forward, and your housing situation. The sooner you take action once you’ve fallen behind on your mortgage payments, the better.
If you’ve fallen behind on your mortgage payments and are going through financial hardship, that’s ok. This can happen to anybody and the challenges that you’re facing are likely out of your control.There’s no reason to be embarrassed or ashamed about falling behind on your mortgage payments. You’d be surprised to find out how many people have experienced this particular challenge and that a lot of people who have fallen behind on their mortgages have good jobs and are financially well-off.
If you start to fall behind on making your mortgage payments, one of the first things you should do is contact your mortgage servicer. Their contact information, including their telephone number, is on your mortgage statement. Mortgage loans are often sold or transferred to other financial institutions, so don’t be surprised if your mortgage has changed hands several times since you first got your home loan. Tell your mortgage servicer that you’re having trouble paying your monthly mortgage and want to discuss what options you have available during this challenging time.
Catching Up on Missed Payments
There are different things homeowners who have fallen behind on their mortgage payments can do to catch up, including:
Housing Counseling: Getting guidance and assistance from a housing counselor who deals with these types of situations can be very helpful. Talking to a HUD-approved counselor is your best first step. They can help you get a better idea of what you’re facing and what the best options might be in your unique situation.
Refinancing: If your credit is still good, you can refinance your home loan with another mortgage company. This is why it’s important to address the issue early on before missed payments affect your credit score. Keep in mind there will also be closing costs if you choose this route.
LoanModification: This is when you change, or modify, the original terms on your home loan to reduce your monthly mortgage payments. You might be able to achieve a loan modification with a lower credit score than you would refinancing.
Forbearance: This essentially means that you’ll pause payments on your loan for a set period of time. It’s a temporary fix but could be a good option if you anticipate that your financial hardship will be resolved in the short term. Government-sponsored loan servicers like Freddie Mac or Fannie Mae have specific forbearance criteria.
Repayment Plan: This spreads the past-due amount of your monthly mortgage payments across several months. Once your repayment plan has been completed successfully, you can ask the lender for a reinstatement. The risk of foreclosure is stopped by reinstatement, as long as you stay current on your regular mortgage payments moving forward.
Sale of the Home: An ordinary sale of the home or a short sale may be something to consider if you have fallen behind on your loan payments and don’t want to remain in the home and/or cannot afford to remain in your residence.
Bankruptcy: This is often a last resort. Bankruptcy can provide a fresh start but there are restrictions. Depending on your financial situation, bankruptcy can help you catch up on your missed mortgage payments over a period of time.
What Happens if My Payment Is Late?
If you’ve had late payments or missed payments, you’ll probably start to get some phone calls and collection letters from your mortgage lender or servicer. You can expect them to tack on late fees and penalties, in addition to the interest rate already added to your normal monthly payments. These are all short-term consequences of falling behind on your mortgage payments. While these consequences are frustrating and you may feel tempted to ignore them, don’t. Keeping your head out of the sand and being proactive is going to be better for you in the long run.
The most serious potential long-term consequence of late or missed mortgage payments is foreclosure. Foreclosure is a legal process that allows mortgage lenders to recoup some or all of the outstanding loan balance—the past-due amount, plus late fees and costs—by taking the home and selling it to the highest bidder at an auction or sheriff’s sale. Foreclosure can be really scary and serious, but it can be avoided by those actions outlined below that are appropriate for your situation.
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Borrowers who are going through financial hardship can request a loan modification. A loan modification permanently changes the terms of your mortgage. A loan modification is best used to get a lower interest rate or perhaps a longer term (the number of years you pay) on your mortgage by negotiating a lower monthly payment rate. Your loan servicer may be willing to add your missed payments to the loan balance and switch your mortgage repayment status to “current” as part of a loan modification. Two potential downsides of a loan modification are that it may take longer than before to pay off your loan, and that you may end up paying more in interest than you had been previously.
Having a game plan and being able to show that you are taking good faith steps to budget and stay current on your loan will help when you contact your servicer about approval for a loan modification.
Refinancing is another helpful tool in your home loan arsenal. It is an especially good option for people who have a good credit score but have fallen behind on their adjustable-rate mortgage and would like to have a fixed-rate loan or for those who had higher interest rate when they first took out their mortgage compared to the present wherein interest rates are incredibly low. Before you look into refinancing, you may want to review your credit report and think about whether you want to stay in your home for the long term. Refinancing may not be possible for those who do not currently have a good credit score or clean credit report.
By getting in touch with your loan servicer, you may be able to get on a payment plan for the mortgage arrears (the past-due amount) and get the loan current after you’ve paid the outstanding loan balance over time. Once you have completed your repayment plan, you’ll be eligible for a reinstatement of your mortgage loan, if applicable.
Depending on your financial outlook and the balance of your mortgage arrears, your loan servicer may be willing to waive fees and penalties related to your missed and/or late payments as part of a repayment plan. You don’t know what opportunities are available to you unless you ask, so get in touch with your loan servicer as soon as you can.
Lump Sum Repayment
Some people are able to pay back their past-due amount in a lump sum. If you can afford that and your loan servicer then reinstates your loan, you’re doing pretty well, all things considered. The tricky part is coming up with the lump sum. That can be a lot of money and not everyone can come up with that kind of cash quickly. It might not be the best idea to borrow additional money to come up with that lump sum if you’re already having budget issues.
Don’t stress out about this! It’s ok! Be thoughtful and realistic about your financial situation. If you’re able to make some budget changes and sell unnecessary property, that might be a better way of coming up with the lump sum to become current on your loan than borrowing money would be.
You’ve probably heard about forbearance in regards to student loan debt. The same type of idea applies to mortgages. A forbearance allows you to temporarily pause your repayment obligations because of a hardship. A mortgage forbearance may be a viable temporary solution for homeowners who are struggling and going through financial hardship, like the economic effects of the coronavirus pandemic.
The forbearance period is the time during which your mortgage payments are either on hold or reduced. During the forbearance period, your mortgage servicer should report to the credit bureaus that you’re current on your mortgage loan. At the end of the forbearance, you may have to pay a lump sum or partial payments.
You might be eligible for a COVID-19 hardship forbearance under the CARES Act if you have been affected directly or indirectly by the coronavirus pandemic and you have a federally backed mortgage through Fannie Mae or Freddie Mac, a Veteran’s Administration (VA) loan, or a mortgage from HUD, the FHA, or the USDA.
Loan servicers that are private and not federally backed may also offer opportunities for forbearance due to hardship stemming from the coronavirus pandemic. You should check with your loan servicer to see what your mortgage assistance program options are.
Even though it may be really scary when you fall behind on your mortgage payments, ignoring or downplaying the problem will only inspire negative consequences, like foreclosure and eviction. Get out in front of this issue sooner rather than later. Remember that there are many options and resources available for homeowners that have fallen behind on their mortgage payments.
You’ve got this! Stay the course, stay confident, and make well-informed, realistic decisions after you’ve had the chance to learn, reflect, and act courageously to tackle your financial and housing issues head on. Be sure to stay on top of things and thoroughly review other related articles on the Upsolve Learning Center site so that you can be both well-informed about your options and empowered to act upon them.