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Financial difficulties may affect everyone at some point. A past-due notice from a utility company, a late charge on your credit card statement or an accidental overdraft on your bank account can be easily remedied. But when your financial problems are bigger—say, months of missed mortgage payments—the stakes are a lot higher. If you’re having trouble paying your mortgage, here’s what you need to know.
I’m Behind on my Mortgage Payments, What Do I Do?
People fall behind on their mortgage for many reasons. Job loss or income reduction, an illness or injury that prevents you from working, divorce or separation, the death of a spouse or family member, and medical debt can all cause you to be unable to make your mortgage payments and take care of other important financial obligations.
When you’re dealing with life-changing circumstances, it’s only natural for you to be stressed. You may worry about where you’ll go if your home is foreclosed on; what your neighbors, friends, and family will think; how it will impact your credit score; and whether you’ll ever be able to buy a home again.
You’re not alone. According to the FDIC, 250,000 new families enter foreclosure every three months. Many people never contact their lender for help, either out of embarrassment or because they fear that reaching out for help would cause them to lose their home even quicker.
Thankfully, this is not the case. Your lender wants to help, and they have a vested interest in doing so, because foreclosures are expensive. By failing to keep you in your home, lenders often lose thousands of dollars in the process!
If you’re behind on mortgage payments—or even if you’re experiencing a circumstance that has the potential to cause you to fall behind—the time to speak to your lender is now. The sooner you reach out, the more options you have available, and the better the chance your situation can be fully resolved. There is help. You just need to ask for it.
Contact Your Lender Immediately
With 78% of full-time workers living paycheck to paycheck, just a few days of missed work can cause you to be late on your mortgage payment or miss it altogether. If you’re already behind by a payment or two, the situation can quickly become drastic.
Reach out to your lender immediately—ideally, before they reach out to you. This shows you’re proactively looking for solutions instead of trying to dodge your obligations. Be prepared to explain your circumstances, what you’re doing about them, and what you need from your lender.
Don’t let your pride get in the way of asking for what you need. While it’s normal to feel embarrassed, remember that your lender fields hundreds, if not thousands of calls a month just like yours. They won’t judge, scold, or dismiss you; their job is to help keep you in your home.
Starting early is important before you fall too far behind on your payments, but even if you’ve ignored their calls and letters in the past, you may still have options. Whether you’re past due by three days, three months, or even three years, the first step is to pick up the phone and call.
Options for Catching Up on Missed Payments
Depending on your situation, your lender may offer you one of several different options.
Mortgage Refinancing
A refinance is a long-term solution for borrowers with good credit. When you refinance your mortgage, you replace the existing loan with a new loan that has more favorable terms, such as a lower rate or a fixed rate instead of an adjustable rate.
Borrowers can shop for the best refinancing rates from different lenders, who may charge a refinancing fee to take on the new mortgage. Both a refinance and a loan modification will change the terms of the mortgage (and therefore the monthly payments), but the refi involves a whole new loan for borrowers who qualify.
Loan Modification
If you’re facing long-term financial difficulties (a reduction in hours or income, a divorce, medical bills, or increasing payments due to an adjustable rate mortgage) and don’t qualify for a full refinance, a loan modification may be right for you. When you obtain a loan modification, the lender works with you to change certain terms of the loan to make monthly payments more manageable. The original loan is still in place, but the more favorable terms are in effect for a set period of time to help out the borrower.
Different types of loan modifications include:
- Reducing the interest rate
- Lengthening the term of the loan
- Wrapping missed payments into the outstanding balance of the loan
- Reducing the amount of money owed
While loan modifications are often a great option for borrowers who have missed multiple payments or have less-than-stellar credit, keep in mind that most lenders still want to see that the borrower is making a good-faith effort to make payments on their mortgage.
Mortgage Forbearance
A forbearance allows you to hit the pause button on your loan payments for a set amount of time. This solution is best for those who only have a short-term cash flow problem—for instance, if you’ll be out of work for a few months due to a medical procedure or after you are impacted by a natural disaster.
Once the forbearance ends, you’ll start making your normal monthly payments again, and you’ll also be required to catch up on the principal and interest payments you missed, either by paying a lump sum or chipping away at the balance through partial payments over a set number of months. Or, if your financial difficulties become more long-term, you may be reviewed for a loan modification.
Loan Repayment Plans
If you’re only a few months behind and can bring your loan current in a reasonably short amount of time, your lender may suggest a repayment plan.
A repayment plan requires to you make your regular payments as scheduled, as well as paying extra each month toward the past due amount, which must be paid in full by the end of the plan period.
For instance, if your mortgage is $1,200 a month and you’ve missed three payments, the $3,600 deficit may be split up over the next six months. This will drive your payment up to $1,800 a month temporarily, but it will allow you to avoid having to come up with three missed payments at once.
Principal Reduction
If you’re underwater on your loan (meaning you owe more than your home is worth), a principal reduction may be beneficial. It’s just what it sounds like – the principal amount on your loan is lowered to more accurately match your home’s current value, which can lower your monthly payment.
Why would a lender do this? As we said before – foreclosures are expensive. By reducing the principal, you get to stay in your home, and the lender avoids the hassle of foreclosure by choosing the lesser of two evils.
Local and State Homeowner Resources
Even if your lender is unable to offer a solution, all is not necessarily lost. By turning to local and state homeowner resources, you may be able to prevent foreclosure.
Avoid Foreclosure at All Costs!
The threat of foreclosure is scary, and some people believe it’s easier to just walk away from the home rather than going through the process. This is one of the worst things you can do.
A foreclosure will negatively impact your credit score. This will make it difficult to obtain rental housing, credit cards, and loans. The foreclosure will remain on your credit report for seven years, and has the potential to affect your life the entire time.
The Bottom Line
From loan modifications to repayment agreements and beyond, there are plenty of ways to avoid foreclosure. If you’re in danger of losing your home, it’s crucial to be proactive. Reach out to your lender and explore your options as soon as you feel yourself getting dangerously close to the slope. You’ll be glad you did.
Do you have any questions? Let us be a resource. Contact a Pennymac loan officer today and let’s get started!
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