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If you can't pay your mortgage, you'll face a host of unfortunate consequences. Falling behind on your mortgage could significantly damage your credit score. And once you fall at least 120 days behind on mortgage payments, your lender could start the process of foreclosing on your home.
If you can't make your mortgage payments, it's imperative that you get ahead of the problem before it escalates. Here's what to do.
It's in your mortgage lender's best interest to avoid a foreclosure. Remember, lenders make money when you pay interest on a loan; they're not in the business of owning and selling properties. Therefore, if you can't pay your mortgage, reach out and ask for help. Your lender may have a couple of options to offer you.
Mortgage forbearance allows you to pause your mortgage payments temporarily, and you'll have to work the exact time frame out with your lender. During that period, interest will accrue on your outstanding mortgage balance. Once your forbearance period ends, you'll need to catch up on the payments you missed. Your lender will work with you to establish a timeline to do so.
Some lenders won't report an account in forbearance to the credit bureaus that determine your credit score, but some will. But if even forbearance is put on your credit report, it won't hurt your credit score nearly as badly as missed payments or a foreclosure. So it's a good option if you're in a bad spot financially, but expect to be able to pay your mortgage in the future.
With a loan modification, you'll work with your mortgage lender to change the terms of your mortgage so that your payments become easier to manage. Note that loan modification is not the same thing as refinancing your mortgage. With a refinance, you swap your existing mortgage for a new one. With loan modification, you keep your existing mortgage but alter it.
The goal of loan modification is to allow you to keep up with your mortgage payments and avoid foreclosure. Like forbearance, modification may appear on your credit report, but it won't damage your credit score as much as late payments or foreclosure. It's common practice to request loan modification after going through forbearance, though you don't necessarily need to do so. You can request loan modification by itself, but be prepared to show your lender proof of a financial hardship. You can also request loan modification if you're already behind on your mortgage payments but haven't gotten into too deep of a hole.
If you're struggling to make your mortgage payments and your credit score is in good shape, you can try refinancing your mortgage. In doing so, you'll get a new loan with different terms that could make your monthly payments more affordable.
For example, you might refinance a 30-year fixed mortgage with a 4.5% interest rate to a 30-year loan with a 3% interest rate. For a $100,000 mortgage, that will lower your monthly principal and interest payments by about $85. It pays to calculate your monthly payment based on today's interest rates to see how much lower you could get it.
Refinancing might also lower your monthly payment by extending your loan term. If you have a 15-year mortgage, refinancing to a 20- or 30-year mortgage could also reduce your monthly payments. That's because you stretch the time you'll take to pay off your balance, even if you don't manage to lower your interest rate all that much.
Either way, it pays to talk to different refinance lenders and see what rates and options you're eligible for. Some lenders will even write custom loans. That way, if you qualify for a much lower rate but don't want to reset the clock on your mortgage, you can sign a new loan with a term that works for you. For example, if you have 22 years left on your mortgage, you may find a lender that lets you refinance to a new 22-year loan at a lower rate.
Renting out a portion of your home is a good way to generate income. This option won't be feasible for everyone. If you're a family of four in a small, two-bedroom condo, taking in a tenant won't work. But if you have a larger home with a finished basement with a separate entrance, you may be able to rent it out. Of course, that's assuming your local zoning laws allow it. You could then use your rental income to stay current on your mortgage.
It may be that the above solutions don't work for you and you don't expect your financial situation to improve anytime soon. If that's the case and you can't pay your mortgage, you may need to sell your home. If your home is worth more than your remaining mortgage balance, you can sell it and use the proceeds to pay off your mortgage lender. You could then buy or rent a less expensive home that better fits into your budget.
If you're underwater on your mortgage -- meaning you owe your lender more than what your home will sell for -- things get a little more complicated. In that situation, you can ask your lender to agree to a short sale. This is where your lender accepts the proceeds from the sale of your home, even if they don't cover your remaining mortgage balance, and then forgives the rest of the money you owe. Lenders won't always agree to a short sale since it means losing money. But in many cases, the process of a short sale is easier for lenders than dealing with foreclosure, and so they're willing to do it. Also, a short sale will hurt your credit score, but it won't cause the same damage as a foreclosure (though both will stay on your credit report for seven years).
Being delinquent on your mortgage could destroy your credit and cause you to lose your home. If you can't pay your mortgage, take action. The above moves could help you stay in your home and make it easier to afford.
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Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.
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