A Guide to Handling Mortgage Payments For the Unemployed

Unemployment and Mortgage Payments

Suppose you lose a 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 is likely to become desperate.

Losing your house is perhaps the biggest financial risk an average American would ever face. Let us look through the steps you can follow to reduce the chance of foreclosure.

Steps to Find Help With Mortgage Payments if Unemployed

Step #1: Buy Insurance

If you think 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 the house from them. Mortgage protection insurance works as follows:

If you lose your job within a specified time after buying the house (typically 2 years), you will be covered for the full amount (as long as it is under the limit) of:

• mortgage payments
  
• taxes
• home insurance payments

The limit varies depending on your situation, but it is generally in the range of $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 sales gimmick rather than a serious solution.

Step #2: Rely on Savings

If you just lost your job, you should immediately take count of all your savings and accounts to understand how long you can afford to make mortgage payments before running out of money. Don’t forget to count your severance payment, unemployment benefits and any savings you have accumulated.

If you have enough money to last for at least 6-8 months, and you feel optimistic about finding a job, by all means give it a try. Just make sure you move to step 3 with at least 2-3 months to spare before your money runs out.

Step #3: Contact Your Lender

Once you are at a point where you cannot make payments soon, contact the lender as soon as possible. Don’t wait until your mortgage is delinquent! The earlier you start on this step, the better the chance to come out of this unharmed.

The goal is to buy extra time, which is hopefully enough for you to find a job. Your first option is to request your lender to spread out your mortgage payments over a longer period of time. Note that this option will cost you more in interest payments over the long-term, however.

Another way to buy time is to request a change in mortgage terms. For example, you may want to negotiate a lower interest rate or freeze the interest rate on an adjustable rate mortgage. This will reduce the payments and your current savings might last you a bit longer.

If your house value is high enough, you may be able to refinance it with a cash-out. The cash you receive could be enough to take care of monthly payments for a long time, just make sure to spend it wisely!

Step #4: Seek Help from the FHA

If you’ve reached a point where the mortgage is delinquent, you still have a chance. Certain mortgages qualify for a “partial claim” arrangement with the Federal Housing Administration, which provides you with 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.

Be careful, though, since once you become delinquent the lender might simply take all the partial payments you send them and still foreclose on your home. It is really worth hiring an expert to help at this point.