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4 Steps to Prevent Mortgage Default When You Lose Your Job

Sad man siting on a benchSuppose you lose your job, but still have monthly mortgage payments to make. Unfortunately, few people can keep up with their mortgage payments with only unemployment benefits to rely on. Plus, if your benefits run out before you find your next job, the situation will likely become desperate.

The thought of losing your house is devastating, but know that there are steps you can take to ensure you don’t default on your loan and risk foreclosure in the event you are unemployed.

How to Handle Mortgage Payments When You’re Unemployed

Step No. 1: Review Your Insurance

If you plan in advance, you can insure yourself against suffering through unemployment with various mortgage protection programs offered by insurers. Sometimes home builders even throw in free unemployment insurance to entice you to buy a house from them. Mortgage protection insurance works as follows:

If you lose your job within a specified time after buying the house, typically two years, you will be covered for the full amount of:

  • Mortgage payments
  • Taxes
  • Home insurance payments

You’ll receive this coverage so long as these costs are within the specified limit, which generally ranges from $2,000 to $3,000 per month. Unfortunately, no insurance currently available will cover you for the full life of the mortgage (e.g., 30 years), nor will it cover you in the case of extended unemployment. This means job loss insurance should be considered a short-term solution.

Step No. 2: Dip into Savings

If you just lost your job, you should immediately take count of all your savings and determine how long you can afford to make mortgage payments before running out of money. Don’t forget to count your severance package, unemployment benefits and any emergency savings you have accumulated, while also considering the costs of your other necessities.

If you have enough money to last at least six to eight months, and you feel optimistic about finding a new job, by all means give it a try. Just make sure you move to step No. 3 with at least two to three months to spare before your money runs out.

Step No. 3: Contact Your Lender

Once it looks like you’ll soon be unable to make any more payments, contact your lender — don’t wait until your mortgage is delinquent! The earlier you start this step, the better your chances will be to come out of this on top.

“Almost all lenders are willing to work with homeowners who have a temporary hardship,” Greg Cook of FirstTimeHomeBuyersNetwork.com said. “The first call — before they
miss a payment — should be to the customer service department of their current lender and see what arrangements can be worked out.”

As long as you reach out to your lender before you miss any payments, there is a good chance a deal can be struck.

“The most commonly used program is forbearance, a deferment of the missed payments for a set period of time,” Cook said. “Those payments [might] either be added to the end of the loan or amortized over a period once the hardship is removed.”

Step No. 4: Seek Help from the FHA

If you’ve become delinquent on your mortgage, seek out programs for homeowners in your situation. For example, certain mortgages qualify for a “partial claim” arrangement with the Federal Housing Administration, which provides you an interest-free loan from the government that covers all your missed payments up to 12 months. This loan does not have to be repaid until you sell the house or pay off the mortgage.

The partial claim arrangement is a great deal, so you should definitely go for it if you qualify. Furthermore, you can continue negotiating with the lender at the same time.

Regardless of which option you choose, it’s best to speak with a mortgage expert and determine the best course of action, as well as any repercussions, before moving forward.

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