Everybody goes through difficult times. It’s easy to fall behind on your mortgage payments—especially during financial crises, like the current recession caused by COVID-19. The Mortgage Bankers Association reported that the number of mortgage holders that were at least one month late on payments shot up from 2.73% in March 2020 to 3.74% in April 2020. This information was taken from a survey that included 26.9 million loans—or about 54% of the overall mortgage market. That means in just one month, the number of households late on their payments increased by approximately 270,000.
So if you’re late on your mortgage payment, you’re not alone. It’s important to assess the situation clearly, and not panic. You have options, especially with everything that is going on right now. Here is what you should know if you think you won’t make next month’s payment.
What are the consequences of missing a mortgage payment
If you miss a payment, nothing will happen right away. But if you ignore the missed payment and let it escalate, there are consequences. The exact timeline of penalties will depend on the state you live in and your lender. But here is a general idea of what will happen if you miss a mortgage payment:
- 15 Days later: Typically, a 15-day grace period where you can still make the payment is initially granted. Nothing will happen during that time. After the 15 day point, you may start receiving notices or phone calls from your lender inquiring about the payment.
- 30 Days later: If after 30 days you still haven’t paid or made other arrangements, you are officially in default. Especially if you miss the current month’s payment as well. At this point, you may be subject to late fees. Plus, the notices and phone calls may get a bit more intimidating.
- 120 Days later: Once, you’re four months late, the lender will typically begin the foreclosure process. Every state has different regulations regarding this process, but this is typically the point where the lender will take legal action. If you do not make arrangements, you may receive an eviction notice and the home could be repossessed by the lender at this time.
How quickly you’re evicted depends on how many foreclosures are happening in your area. Lenders must seek court approval before evicting a resident. So, if the courts are backed up with other cases, you may be able to stay in your home for a while.
The best thing you can do is to face the situation head-on. Especially now, most lenders will be looking to strike a deal than throw you out on the street. That said, it is in your best interest to act quickly.
What are my options if I cannot make my mortgage payments?
Negotiate with the lender
The first thing you should do is call your lender. They will likely have advice or refinancing options available. They will likely want to strike a deal just as much as you do. Under normal circumstances, one or two foreclosures will not impact their balance sheets in any meaningful way. But in the event of mass foreclosures and limited demand for those looking for a new home, lenders will do whatever they can with some money coming in. If you simply reach out to the lender, you can likely reach an agreement. Some services are easier to negotiate with than others, but it’s your best bet to nip the problem in the bud.
Seek government assistance
The Government is currently offering several programs to help those impacted by COVID-19. All mortgages backed by the FHFA, which includes all loans owned by Freddie Mac or Fannie Mae, have been directed to suspend foreclosure proceedings until further notice. Other federal housing programs like HUD and the VA are offering similar assistance to borrowers. So, if you took out a federally insured loan to buy your home, there is help available. Also, the Making Home Affordable Project is another government resource that helps families in need with mortgage assistance.
Refinance your loan
Refinancing your mortgage is always an option. Perhaps you’re still employed, but your income has been reduced by the pandemic. Or you own a business that is experiencing a loss of revenue in the short term due to social distancing. You may choose to refinance your mortgage to make smaller payments for the time being. Then, increase the payments again when you’re back on your feet.
For example, if you originally had a fixed-rate loan, you could switch to an adjustable rate, which could decrease payments in the short term. If you’re still uncertain of what the future will hold, you may be delaying the inevitable by refinancing. But if you have good reason to believe your finances will bounce back post-COVID, this is an option. Refinancing often costs a fee, but lenders may be willing to waive that fee if you show an effort to make a deal.
Apply for loan modification or mortgage forbearance
Loan modification is similar to refinancing, but it is specifically for those facing financial hardships. Mortgage forbearance is a type of loan modification where borrowers can reduce or delay payments entirely for a given period. What type of loan modification or forbearance options are available depends on the lender. The expectation is that the homeowner still makes payments. However, this could grant you a reprieve to settle your finances. In some situations, you can delay payments for a period, but you must pay them back in full after that period. In other situations, the missed payments are tacked on to the end of the home loan.
Contact your lender to find out what options are available. Their number will be provided on your monthly statements or you can look them up using this tool.
Offer the lender a deed-in-lieu
If your future is looking uncertain you may decide it’s better to walk away. If you can move in with someone else for a while or make other arrangements, you could offer the lender a deed in lieu of foreclosure. This would transfer the ownership of the property to the lender to satisfy any outstanding debt. This is an option if you know foreclosure is on the horizon and you want to avoid costly proceedings.
Not all lenders will accept this option, but it has benefits for both parties. It’s more private and less expensive than a foreclosure. And in some circumstances, the lender may allow the borrower to lease the property for a period. If the outstanding debt is considerably greater than the value of the property, the lender may not offer this as an option. But it’s something to consider if you’re starting to get underwater.
Sell the property in a short sale
The other option is a short sale. A short sale is when the borrower sells the home for less than what is owed on the mortgage and gives it to the lender. The lender can either forgive the loan and let the borrower walk away or require that the outstanding balance be paid at a later date.
A short sale is a good option if you’ve made progress on the loan and you believe the property’s market value will be close to what you owe. It won’t hurt your credit as much as a foreclosure and in some cases, you may be able to walk away with minimal debt. It’s up to the lender whether or not they approve the short sale. But it’s an option to avoid the headaches of going through a foreclosure.
Declaring bankruptcy will ruin your credit and make it hard to get another loan in the foreseeable future, but it can have certain advantages if you act at the right time.
If you behind on payments, you could declare Chapter 7 bankruptcy early in the foreclosure process. This would prevent any creditors from harassing you until a court schedules a bankruptcy hearing. You could use the time to regroup and make a plan. If you’re able to resume making payments after the bankruptcy hearing, you could keep your house and potentially apply for a loan modification. The elimination of other outstanding debts may make it easier to get the lender to approve a new rate. If you will not be able to continue to make payments, you will lose the house, but the debt will be discharged.
If you file for Chapter 13 bankruptcy, you can make payments to creditors over a 3 to 5 year period. In this case, you would be able to keep your property if you fulfill the requirements and make the future payments on time. But to keep your home you must declare bankruptcy before foreclosure.
Bankruptcy is usually the last option a homeowner has before simply walking away and accepting foreclosure. If you are in a dire situation and want to mitigate the damage, it’s a way to take care of your outstanding debt in a responsible way. It does carry consequences, but nothing worse than what would happen if you go through with a foreclosure.
Just remember to ask for help
If you’re struggling to make your mortgage payments, the best thing to do is reach out for help. According to a poll conducted by Freddie Mac/Roper in 2005, more than 6 in 10 homeowners delinquent in their mortgage payments are not aware of services that mortgage lenders can offer to individuals having trouble with their mortgage. If you look to the appropriate resources for assistance and information, will likely find a manageable solution. But if you let the situation spiral out of control, the damage will be much worse.