Here's What Happens When You Can't Make Your Mortgage Payment

Reaching out to your lender should be your first step.

It's been a very difficult time to be an ordinary American homeowner as of late. If you bought a home in the last few years, you might be grappling with higher housing payments due to elevated home values. They climbed in the last three years during the COVID-19 pandemic as Americans changed their priorities and fled city rentals to buy homes in areas with more breathing space. The Federal Reserve Bank of St. Louis reports that the median sale price of a home as of Q4 2022 was $467,700; just three years prior, in Q4 2019, that figure was $327,100.

If you're in the position of no longer being able to afford your mortgage loan payments, you're likely panicking and wondering what happens now. I've been in your shoes before (thanks to getting laid off the last time I owned a home), and it's something no one wants to experience, ever. Here's what to do if you can't afford your next payment.

Contact your mortgage loan servicer for options

Your first move in this situation should be to contact your loan servicer as soon as you realize you can't pay your mortgage. It's a smart idea to run through your costs and budget again ahead of that phone call to make sure you're truly coming up short and haven't overlooked a bit of money you could apply to the payment.

Your loan servicer has definitely heard from people in your situation before, and will have options for you to stay in your home (or not, if you decide you want to get out from under your loan). These will include forbearance programs, which can give you the chance to pause your loan payments with the understanding that you'll make up what you owe later.

Another option might be a loan modification, which changes the terms of your existing mortgage to make it more affordable for you. The change could be temporarily lowering your interest rate or lengthening the term of your loan (say, going from a 15-year fixed-rate mortgage to a 30-year loan instead).

You might be able to refinance your mortgage loan to make it more affordable. If you signed your loan at a high interest rate, those extra costs could be contributing to your difficulties paying. As of this writing, the average interest rate on a 30-year fixed-rate mortgage is 6.12%, per Freddie Mac. While this is a far cry from the salad days of rates in the 3% range at the start of 2022, it might be lower than your rate, especially if your credit score wasn't so good when you got your loan and you've improved it since.

If you wait, your options could be fewer

It's important to reach out to your servicer before you fall behind, because if you wait, you could start the clock on foreclosure proceedings. If you are 120 days behind on your mortgage payments, you could find yourself forced out of your home as your lender takes it and sells it to recoup its costs.

Another less-pleasant (but still better than foreclosure) prospect is a short sale. I've been through this, and it's the option for when you can no longer afford your mortgage payments and won't be able to despite a loan modification, or need to get out from under the loan. The nice thing about a short sale is that you'll incur less credit score damage than you would with a foreclosure, and in my case (and possibly in yours), I was given several thousand dollars as a seller incentive from my loan servicer.

How to avoid this situation

If you're not currently struggling to afford your mortgage payments, you might be wondering how to avoid it in the future. It comes down to money, as many things do.

Make a larger down payment

This is a good way to avoid ending up underwater on your home loan, which is when you owe more on the home than it's worth. If you can afford your payments and the market in your area just happens to be down, this isn't a big deal unless you need to sell your home. If you begin your homeownership journey with more money sunk into your home loan, you might also get a lower mortgage rate, reducing your payments and keeping them more affordable.

Don't buy more home than you can afford

If you've been renting for a while, it may be tempting to go all out on a home purchase. Resist this impulse and try to keep your total homeownership costs to less than 30% of your take-home pay to ensure affordability.

Save a solid emergency fund

A stash of cash in a high-yield savings account or money market account, amounting to at least three months' worth of your necessary expenses, is one of your best financial friends. If you suffer a job loss, have a surprise bill, or encounter another need for money in a pinch, you can raid this account to avoid going into debt -- or falling behind on your mortgage payments.

Many people have been in your shoes, and it's not a happy place to be. If you talk to your mortgage servicer as soon as you realize you're going to come up short, it will have options for you to get past this financial issue.