7 Steps to Prevent Mortgage Default When You Lose Your Job

Learn how to avoid mortgage default even if you’re unemployed.

If you were recently fired or let go from your job, you might be worried about making your monthly mortgage payments. Unfortunately, you might also find it difficult to keep up with your mortgage payments if you’re relying solely on unemployment benefits. If those benefits run out before you find your next job, you might feel desperate.

Though the thought of losing your home is devastating, there are steps you can take to prevent mortgage default if you become unemployed. Read on to learn what you can do when you can’t afford your mortgage.

Step No. 1: Review Your Insurance

It’s true: Some insurance policies cover your mortgage payments if you become unemployed. If you planned in advance, you might have insured yourself against suffering through unemployment with a mortgage-protection insurance program. One example of a mortgage-protection insurance program is Genworth Financial’s Involuntary Unemployment Insurance plan — which is offered for free with many of its mortgage-insurance products.

How mortgage protection insurance works is easy to understand. Should you lose your job within a specified time after you buy your house — typically, two years — mortgage protection insurance will cover you for the full amount of:

  • Mortgage payments
  • Taxes
  • Home-insurance payments

You’ll receive this coverage as long as your mortgage costs are within the specified insurance limit — for Genworth, for example, the limit is up to $2,000 per month. Genworth insurance covers you for a limited time period of six months, so it won’t cover all of your mortgage payments if you haven’t found employment by the end of that window. Because insurance doesn’t pay your mortgage indefinitely, it’s crucial that you consider it a short-term solution.

Step No. 2: Dip Into Savings

In the event you lose your job, the first thing you should do is calculate your total available savings and create a basic living budget. Next, figure out how long you can afford to make your mortgage payments before you run out of money.

When you calculate your available money, don’t forget to count your severance package, unemployment benefits and any emergency savings you have accumulated, and make sure you consider the costs of your other necessities aside from your mortgage.

If you have enough money to last at least six to eight months and you feel optimistic about finding a new job, you might want to try living off your savings for a short time. Just make sure you move to step No. 3 with at least two to three months to spare before your money runs out.

Find Out: When to Use Your Emergency Fund

Step No. 3: Contact Your Lender

Once it looks like you’ll be unable to make any more payments, contact your lender — don’t wait until your mortgage is delinquent. The earlier you take this step, the more time you’ll have to find a way to keep from defaulting on your mortgage.

If you reach out to your lender before you miss any payments, you might be able to arrange a payment plan and avoid home foreclosure. After you talk to your lender, explain your situation in a written hardship letter. A formal letter gives you the chance to describe your job-loss situation, explain that it’s temporary and offer a timeline of how and when you’ll be able to make payments again. Writing this letter shows that you’re taking responsibility for your mortgage loan and being proactive instead of walking away from your financial obligation.

Use this mortgage hardship letter example from the Ohio Department of Commerce Finance Division to guide your own writing. Don’t forget to include your mortgage number and contact details.

Step No. 4: Consider Forbearance

After you state your case to your lender in person and in a hardship letter, the lender might offer you the opportunity to participate in a forbearance program, which could temporarily lower your mortgage payments or suspend payments altogether for a short time. The Home Affordable Unemployment Program is an example of one that can temporarily suspend your payments or reduce them to no more than 31 percent of your gross income during your job search.

Many nationwide mortgage lenders participate in this program, including Bank of America, JPMorgan Chase and CitiMortgage. To be eligible, you must live in your home, be eligible to collect unemployment benefits and owe less than $729,250 on your mortgage.

If you don’t qualify for this forbearance program, ask your lender about other options or review FHA-offered programs to try and stop foreclosure from becoming a reality when you’re unemployed.

Step No. 5: Seek Help From the FHA or Other Government Agencies

If your mortgage is insured through or guaranteed by a government agency, you might qualify for mortgage assistance when you lose your job through one of its programs. These agencies include:

  • Federal Housing Administration
  • Fannie Mae
  • Freddie Mac
  • Veterans Affairs
  • U.S. Department of Agriculture

These organizations offer several programs to help unemployed homeowners with their mortgages. For example, certain mortgages qualify for a “partial claim” arrangement with the Federal Housing Administration under the FHA Home Affordable Modification Program, which provides an interest-free loan from the government. You don’t have to repay this until you sell the house or pay off the mortgage. Regardless of which option you choose, it’s best to speak with a mortgage expert before moving forward.

Find Out: What Happens When You Default on a Mortgage Loan

Step No. 6: Ask About Loan Modification or Short Sale

If you don’t qualify for a forbearance program through your lender or a government agency and you’re in danger of missing payments, ask your lender about mortgage modification. A mortgage modification makes a permanent change to your mortgage; changes might include adding overdue payments to your loan balance, extending the number of years you have to pay off your mortgage or changing the interest rate on the loan.

Sometimes job loss forces people to make the hard decision to move out of their homes. If you find yourself in this situation and your lender agrees to it, you might be able to sell your house at the current fair market value, even if that value is less than what’s owed on your mortgage. If you meet certain criteria, you might even receive financial help for your relocation expenses.

Also See: How to Get Free Money When You Need Help Paying Bills

Step No. 7: File Bankruptcy to Avoid or Delay Foreclosure

Once you’ve exhausted all your avenues to prevent defaulting on your mortgage it might be time to consider bankruptcy. Declaring bankruptcy should typically be your last resort because it stays on your credit report for 10 years and can make it difficult to get credit or even certain jobs.

If you qualify and have a regular income, a Chapter 13 bankruptcy might enable you to stop foreclosure proceedings and keep your home. However, you must agree to apply your future income toward the repayment plan the court puts in place.

Filing Chapter 7 bankruptcy stalls your foreclosure proceedings and could buy you some time to work out a deal with your lender or at least save money to use toward renting a new place. It’s important to keep in mind, though, that filing bankruptcy is a serious financial decision, so it’s always a good idea to seek legal advice before you start any proceedings.

In some cases, despite your best efforts, it might be difficult to avoid foreclosure. Research the foreclosure process in your state, as it differs across the country. Take note of when foreclosure proceedings start, which is usually a set number of days after you’ve missed payments and been issued a demand letter from your lender. Generally, foreclosure proceedings begin three to six months after your first missed mortgage payment, but late fees might start accruing just 10 to 15 days from that first missed payment.

Whatever you do, don’t delay — talk to your lender sooner rather than later if you lose your job. That way, you’ll have time to explore all of your options to avoid foreclosure.

Next Up: How Many Mortgage Payments Can I Miss Before Foreclosure?

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