When hard times hit, keeping up with your mortgage payments can be a challenge. Job loss, medical bills and crushing debt problems are just a few situations that can throw you into arrears. The good news is that no matter how serious your delinquency, you have options.
Keep reading to learn about nine things you can do if you can’t afford your mortgage anymore. No one wants to deal with the ramifications of defaulting on a mortgage, but these tips could help ease the pain.
1. Ask Yourself, ‘Can I Refinance My Mortgage?’
Mortgage rates change frequently, so refinancing can lower your payment and save you a bundle if the rate you’re paying is higher than rates on new loans. Although refinancing is a fairly straightforward process, it’s vital that borrowers pursue this option before missing payments, said Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
What is refinancing? Refinancing is taking out a new mortgage loan at a lower rate and using the money from that loan to pay off your current mortgage.
When you refinance a mortgage, you go through the same steps you followed when you applied for your current loan. After you submit your application, the mortgage lender will evaluate your credit, income and debt — and perhaps appraise your home to determine its value. Once the lender approves your application you’ll sign the loan documents.
Although your payment drops when you refinance at a lower rate, you might wind up paying more in the long run. You’ll pay closing costs — like application, appraisal and origination fees — and you’ll pay for the title search and insurance. In addition, you might pay more interest over the long term because you’ll be starting from scratch on a 30-year loan.
2. Declare Bankruptcy
Bankruptcy is a dreaded word for many, but it can also be the fresh start you need to get your finances back on track. “It is often very useful, especially Chapter 13, for reorganizing debts and saving a home from foreclosure,” said Jen Lee, an attorney who specializes in helping businesses and individuals with credit and debt issues. “I talk to many people [for whom] going into bankruptcy earlier rather than later allowed them to keep the house.”
Filing for Chapter 13 bankruptcy can stop foreclosure in its tracks because most creditors are prohibited from taking collection action against people who are in bankruptcy unless the creditors petition the court for permission. House foreclosure is a collection activity, so the bankruptcy filing puts the brakes on your lender’s attempt to recoup its loss by repossessing — and ultimately selling — your home.
On the downside, your credit will take a serious hit. “It ruins your credit and stays on your credit report for 10 years, but surprisingly, you could qualify for prime credit mortgage financing again in as little as two years,” Fleming said.
3. Modify Your Mortgage Loan
A loan modification changes the terms of your loan to make the payments more affordable. Although the government-sponsored Home Affordable Modification Program expired in 2016 and the Freddie Mac and Fannie Mae Home Affordable Refinance Program is set to expire in 2017, you might still be able to modify your loan.
Fannie Mae and Freddie Mac loans that are in default or about to be in default might be eligible for the new Flex Modification program that replaces HARP and aims to reduce the borrower’s mortgage payment by 20 percent. Your lender might have its own propriety program, too, so make sure you ask. Loan modifications are rare these days, Fleming said, but it could be a great option if your lender is open to it.
4. Ask Your Lender to Approve a Short Sale
A short sale happens when a lender allows the homeowner to sell the home for less than he owes on the mortgage. It’s a foreclosure alternative for homeowners who owe more than their homes are worth and who have a documented financial hardship that prevents them from making payments. The lender keeps the sale proceeds, but in some cases, the homeowner receives relocation assistance.
A short sale might be a better option than foreclosure if you’re not too far behind on your home mortgage payments because your credit score will take less of a hit than you’d see with a foreclosure. It’s the long string of missed payments that lead to foreclosure. That said, both short sales and foreclosures get reported as accounts “not paid as agreed.”
Even if the lender agrees to the short sale, there’s a chance you’ll have some liability for the deficiency, which is the difference between the sale price and the amount owed. Some states allow lenders to sue borrowers for the deficiency, and the IRS might tax it as personal income.
5. Request a Deed in Lieu of Foreclosure
Choosing this option means voluntarily turning your deed over to your lender “in lieu of” him foreclosing on your home. The lender agrees to accept the deed as payment.
A benefit of a deed in lieu over a short sale is that a short sale doesn’t allow you to take sale proceeds — other than relocation assistance — but you might get some money from your deed in lieu if you have equity in your home. In addition, you might have some say over the forfeiture timing. Keep in mind that this option might have tax implications, and it becomes more complicated if you have other loans on the home, said Lee.
6. Apply for a Reverse Mortgage
A reverse mortgage lets homeowners age 62 or over draw a lump sum — or receive monthly payments — against their home equity. The primary benefits of a reverse mortgage loan are that you don’t have to pay it back as long as you live in your home and you typically get the money tax-free.
Reverse mortgage loans come with some caveats. You’re still responsible for paying property tax and insurance and you’re required to maintain your home, said Fleming. In addition, you’ll pay closing costs when the loan goes to settlement, and over time, the interest that accrues on the loan might total more than the home’s value. Although neither you nor your heirs will have to pay back more than your home is worth in most cases, you might not have any equity left to leave to your heirs.
7. Sell Your Home
Consider this option if you can sell your home for at least as much as you owe on the mortgage, Fleming and Lee recommend. Fleming said delaying selling when it’s clear that you can’t hold onto the house often digs into your equity — and thus your profits — when you eventually are forced to sell.
“Also, if you wait until you fall behind on your mortgage, it is public record and you may get only lowball offers for your home,” Fleming said. Your home sale can result in significant savings if, in addition to using your sale proceeds to purchase a less expensive home, you move to a place that also has lower property and income taxes.
Read This First: 25 Ways to Sell Your House for a Bigger Profit
8. Become a Landlord
Selling might be unrealistic if you’ve not yet recovered value lost during the recession, but in cities like Atlanta, where sale prices are low but demand for rentals is high, you can turn a nice profit by moving into a less expensive home and renting out your home for at least enough to cover your mortgage payments, including taxes and insurance.
Although there’s plenty of work involved in owning a rental property and you’ll pay taxes on the income, you’ll have several write-offs come tax time. Mortgage interest, depreciation, property tax, repairs and operating expenses are all deductible, according to the IRS.
9. File a Partial Claim
If you’ve missed four to 12 payments on an FHA-backed mortgage loan due to a temporary financial setback you can file a partial claim. You can get an interest-free, U.S. Department of Housing and Urban Development loan that brings the loan current. It’s paid directly to the lender, and it results in a lien against the property that’s released after the claim has been repaid.
What Not to Do
Homeowners who feel as though their situations are hopeless sometimes contemplate walking away from their homes and their mortgage obligations. This is almost never a good idea, according to Fleming. “This is my last option because, in most circumstances, you will not qualify for prime mortgage financing again for seven years after a foreclosure,” he said.
In addition, many states are “recourse” states, which means that if the sale of the house doesn’t cover what you owe, the lender can come after your other property — or even attempt to garnish your wages to cover the deficiency. “I can’t imagine a case where this is a good solution,” said Fleming.
Although you can manage some of these options on your own, you might be better off working with an attorney who can offer mortgage advice that address your specific issues. HUD is another good resource for mortgage help — its housing counselors offer free or low-cost mortgage assistance for a variety of mortgage issues.
Terence Loose contributed to the reporting for this article.