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Alt-tag: Couple sitting across the desk from their financial advisor who’s explaining options if you cannot afford your mortgage payments
You are not alone if you are having trouble making mortgage payments. Rising interest rates to combat inflation and growing recession fears made many people fret over what happens if they fall behind on their mortgage payments. In fact, according to data from July 2022, the percentage of mortgages that are 30 days or more past due but not yet in foreclosure rose to 1.89%. Although it’s now relatively low, it’s guaranteed to soar should a severe economic downturn occur. And on top of inflation, several financial problems could affect your ability to make regular payments. But what are your options if you cannot afford your mortgage payments? We’ve consulted financial experts to help you figure out the best solution, and you’ll find everything you need to know in this article.
What happens if you’re more than 30 days late with your mortgage payment?
It’s crucial to take prompt action if you find yourself unable to make your mortgage payment each month. After all, defaulting on a mortgage can have serious effects on your life and finances, both now and in the future. Therefore, the first step is to contact your lender and discuss potential measures you can take to safeguard your house, finances, and credit.
Caption: Bills and mortgage payments can become problematic if you lose your job or experience any other form of financial stress.
Alt-tag: Woman sitting at a desk and holding her hands on her head while looking at a laptop
When you were getting familiar with the term “mortgage,” you probably learned that the standard practice for lenders is to report delinquencies to the major credit bureaus once payment is 30 days past due. Of course, in addition to any fines or fees associated with the late payment. This adds a bad item to your credit record, which stays there for seven years.
A single late payment can severely impact your credit score, and multiple late payments can have a compounding effect. Missing a few mortgage payments won’t ruin your credit forever, but missing three in a row will prompt your lender to start the foreclosure process, ending with the home being sold at auction.
But take a deep breath and relax because you still have plenty of options if you cannot afford your mortgage payments. Now let’s find out what steps you can take to prevent foreclosure and its associated costs, emotional distress, and damage to your credit score. Remember that the best course of action for you and your family will depend on your financial difficulties, how long you anticipate them lasting, and how much you value your financial stability.
What are your options if you cannot afford your mortgage payments?
If the cost of living rises due to inflation, you might have trouble keeping up with your mortgage payments. Perhaps you lost your job, or you’re going through any other type of financial hardship. However, the worst thing you can do is pretend that not making your mortgage payment every month doesn’t affect you.
Caption: Your financial problems won’t magically resolve themselves, so don’t avoid them but talk to your lender about what are your options if you cannot afford your mortgage payments.
Alt-tag: Mortgage broker explaining options if you cannot afford your mortgage payments to a couple sitting across from him
In fact, you should do just the opposite – you should immediately start looking for a solution. What no one probably told you before applying for a mortgage is that you still have options if you cannot afford your mortgage payments. Therefore, if you find yourself in a situation where you can’t make your monthly mortgage payment, here are six things you can do.
The first option to consider if you’re having financial troubles is forbearance. This option is ideal for those going through a short-term financial crisis. Basically, forbearance means that you can discuss with your loan office whether you can put your mortgage on hold or make smaller installments. In most cases, you won’t have to pay anything more. The interest on your loan will be frozen throughout the forbearance time.
Of course, you’ll have to make up for the overdue payments at some point. You may be able to work out a payment plan with your lender that will allow you to make smaller payments over a longer period of time, or you may need to make one large payment. It’s possible that the lender will allow you to push the overdue payments until the end of your loan term. As the conclusion of your forbearance term approaches, you might expect to hear from your lender again.
2. Refinance or modify your loan
Refinancing or modifying your loan are great options if you have the money to make the payments but need some assistance to catch up. When it comes to refinancing, it’s all about lowering your monthly payment. For it to work, you’ll either need to refinance into a loan with a lower interest rate or a loan with a longer repayment period. In this way, you can spread your balance out over a more extended period, thus reducing your payments.
Keep in mind that there are fees associated with closing a refinancing. However, you may be able to add the closing fees to the loan amount with some lenders. Be mindful that doing so will lead to higher interest payments down the road.
Alternatively, you can modify your loan. This means negotiating more manageable repayment arrangements with your lender. Modifications to a loan may involve:
- Changing terms, such as lengthening the loan’s repayment period.
- Lowering fees and interest rates.
- Even decreasing the principal.
So, if you’re having trouble making ends meet, you might consider getting your mortgage modified so that the payments are more manageable. Depending on what choices your lender is willing to provide, you may be able to extend your repayment term or negotiate a lower interest rate.
3. Rent out your home
It’s possible to rent out your home and stay with friends or relatives if the cost of renting in your location is higher than your mortgage payment. Renting out your home is also a great option if you can’t sell your home and need to offset your mortgage payments with rental income.
Caption: If your friends or family members are willing to help out and offer a place to stay, you can rent out your place and use the opportunity to stabilize your finances.
Alt-tag: Red and white home for rent sign in front of a property
However, there are a few things you should keep in mind before jumping into the landlord business:
- It’s possible that you’ll need to make a few fixes to bring your rental property up to code.
- You might expect to spend more on property insurance if you’re a landlord.
- Maintaining and repairing your home will still be your financial responsibility.
- In the event that you miss a mortgage payment while setting up the rental, you will need to make arrangements to reimburse the missed amount.
In addition, if you have tenants and then go into foreclosure, they may have legal recourse.
4. Sell your home at the auction or settle for a short-sale
Selling at auction may be an option if your home is in poor condition and you have a little mortgage balance to pay off. Put in the amount needed to pay off the mortgage plus any associated closing costs as the minimum bid on the property. You pocket the difference for each amount the house sells over the reserve price.
In a short sale, you and the lender come to an agreement whereby you sell the home, and the lender agrees to accept the proceeds as full payment on the loan. Like any other loan settlement, a short sale will appear as an unfavorable item on your credit record and will likely affect your ratings.
A deficiency judgment is a type of penalty imposed on lenders in some states when the collateral on a loan is worth less than the amount of the debt. A short sale can assist you in avoiding paying this judgment and reduce the damage to your credit score compared to a foreclosure. However, in other jurisdictions, the value of a deficiency judgment that has been remitted is counted as income.
5. Try lowering associated payments
If you require only a modest payment reduction to get back on track, look for ways to reduce the expenses that come with owning a home:
- Reduce your monthly mortgage and home-related expenses by shopping around for property insurance. If you do a little bit of digging, you’ll be able to quickly find a better price.
- Investigate local property tax exemptions to see if you qualify for a reduction in your annual tax bill. This can be especially helpful for retirees, as it can reduce their mortgage payouts.
- Get in touch with your mortgage servicer and ask if you’ve reached the required equity level to cancel Private Mortgage Insurance (PMI). If you qualify and remove this charge, you’ll reduce your monthly mortgage payment.
In the event that your servicer threatens to foreclose on your house, remember that private mortgage insurance (PMI) may be able to help – you can submit a partial PMI claim. To avoid foreclosure, the insurance company will only pay the servicer the amount necessary to cover the missing payments rather than the entire amount of the claim. If you want to know if this is possible, you should examine the fine print of your PMI policy documentation or talk to a real estate lawyer.
6. Sell your home
Selling the house can be the most prudent financial move if its value exceeds the amount still owed on it. A house that has been well maintained may sell rapidly in the current real estate market. In fact, some economists have predicted that the housing bubble in certain parts of the country could soon burst as home values have reached their highest point ever.
Extreme as it may be if you’re having trouble keeping up with your mortgage payments, selling your home immediately for a great price may be the best option. However, you need to do your research and be ready for this. Otherwise, you might end up spending even more money. That’s the last thing you want, keeping in mind your financial struggles. Look into how to prepare your home for a moving estimate and consider doing some minor home staging that can help boost the value of your home.
Until prices stabilize, you might use your money from selling to move into a cheaper home with a more manageable mortgage payment. Or, you can consider renting until you’re back on your feet and can afford a new home. One of the easiest ways to prevent financial strain is to not have a massive mortgage hanging over your head.
Caption: Putting your home for sale is one of your options if you cannot afford your mortgage payments.
Alt-tag: Real estate agent holding a notepad in her left hand while putting up a home for sale sign in front of a property
Keep in mind that even if the sale of your home goes quickly, missing mortgage payments can have a serious adverse effect on your credit reports and scores. Keep up with your bills as best you can while you try to sell your house.
The bottom line
No one likes being in a position where they may soon default on their mortgage or other important financial obligations. Heck, none of the aforementioned options if you cannot afford your mortgage payments are particularly appealing. A few of them may cause damage to your credit score while others may need that you sell your home. However, if you’re in a survival situation, sometimes your only choice is to attempt to limit the damage as much as possible and pick the option that puts you in the best possible position to begin again.
No matter how bleak your financial situation appears, taking swift and immediate action can help you avoid foreclosure or bankruptcy and bring you closer to getting back on your feet, whether in your current house or one that lies ahead. So wait no more but start working on improving your financial situation. You can always quickly jump to an expert finance blog as there, you’ll find the information and advice you need to keep your finances in great shape.
Are you struggling financially at the moment? Here are the top six options if you cannot afford your mortgage payments to help you out.
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