Losing your home can be scary.
When you can't make your mortgage payments, it can feel like there are zero options and the walls are closing in around you. Take a deep breath and listen up, because there are still some options any homeowner under financial duress can consider.
1. Refinance Your Home
The most obvious solution when dealing with financial strife is to refinance your mortgage. In essence, refinancing your mortgage is an attempt to restructure the debt attached to your home. This is a solution for homeowners who aren't at the absolute breaking point, as refinancing can come with up-front costs.
Refinancing involves paying off your current mortgage and taking out a new loan at a lower interest rate. It's a bit like paying off one credit card with another, but refinancing does have its advantages. While there may be closing costs and other fees, you can still come out ahead in the long run.
With refinancing it is also possible to increase the amortization of your loan, meaning you could lower your monthly payment at the expense of having to make payments for a longer period of time.
2. Rent Your Home Out
This works if you have another place to stay. Move in with a family member while you focus on getting your financial house back in order. You can't deduct mortgage interest on your taxes once you become a landlord, but you can still write off property taxes, property management fees, interest costs, or condo fees.
3. Sell Your Home
In situations where you are unable to meet your mortgage payments, the best course of action may be to simply sell the home.
If you have equity in the house it is a straightforward sale, but if your mortgage is underwater -- the outstanding balance on the mortgage exceeds the value of the home -- then there are other options available, such as a short sales or deed transfers.
Suppose you purchased a condo for $350,000 in 2015 and two years later you lose your job and can't make the payments on your mortgage anymore. The economy is in recession and your condo is only worth $250,000. Your mortgage is underwater.
With a short sale, you would get permission from your lender to sell the condo for a price well below the purchase price. Lenders don't typically like this choice because once the condo is sold, they receive less than what the borrowed amount might have been. But a lender may nevertheless agree to it in lieu of going through the foreclosure process.
The other solution is to transfer ownership of the home. The lender becomes the owner and can then sell the house for the collateral. Your credit will take a hit and you lose any equity in the home but you avoid foreclosure.
In the event you can no longer afford your home, it is possible to get a suspension of your mortgage payments in an agreement known as forbearance.
Forbearance agreements are temporary and typically designed to minimize the financial impact on borrowers who, through unforeseen circumstances such as natural disasters, unemployment, or health-related issues are incapable of fulfilling their mortgage obligations.
Lenders may be willing to postpone your mortgage payments because they want to avoid the expense of bankruptcy proceedings. Lenders also face risk in the event of a foreclosure, because they are stuck with a property that has to be sold. It's likely that a lender will lose money on a foreclosure, especially after fees are taken into account, so lenders will sometimes work with creditors until they get payments back on track.
One important thing to remember is that a good relationship between the borrower and the lender can determine whether events shake out smoothly. Inform your lender of your financial distress and work together to come up with a solution that's best for both parties. Communication in that situation is the key.