When hard times hit, keeping up with your mortgage payments can be a challenge. Job loss, medical bills and crushing debt problems are just a few situations that can throw you into arrears. The good news is that no matter how serious your delinquency, you have options.
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Keep reading to learn about nine things you can do if you can’t afford your mortgage anymore. No one wants to deal with the ramifications of defaulting on a mortgage, but these tips could help ease the pain.
1. Ask Yourself, ‘Can I Refinance My Mortgage?’
Mortgage rates change frequently, so refinancing can lower your payment and save you a bundle if the rate you’re paying is higher than rates on new loans. Although refinancing is a fairly straightforward process, it’s vital that borrowers pursue this option before missing payments, said Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
What is refinancing? Refinancing is taking out a new mortgage loan at a lower rate and using the money from that loan to pay off your current mortgage.
When you refinance a mortgage, you go through the same steps you followed when you applied for your current loan. After you submit your application, the mortgage lender will evaluate your credit, income and debt — and perhaps appraise your home to determine its value. Once the lender approves your application you’ll sign the loan documents.
Although your payment drops when you refinance at a lower rate, you might wind up paying more in the long run. You’ll pay closing costs — like application, appraisal and origination fees — and you’ll pay for the title search and insurance. In addition, you might pay more interest over the long term because you’ll be starting from scratch on a 30-year loan.
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2. Declare Bankruptcy
Bankruptcy is a dreaded word for many, but it can also be the fresh start you need to get your finances back on track. “It is often very useful, especially Chapter 13, for reorganizing debts and saving a home from foreclosure,” said Jen Lee, an attorney who specializes in helping businesses and individuals with credit and debt issues. “I talk to many people [for whom] going into bankruptcy earlier rather than later allowed them to keep the house.”
Filing for Chapter 13 bankruptcy can stop foreclosure in its tracks because most creditors are prohibited from taking collection action against people who are in bankruptcy unless the creditors petition the court for permission. House foreclosure is a collection activity, so the bankruptcy filing puts the brakes on your lender’s attempt to recoup its loss by repossessing — and ultimately selling — your home.
On the downside, your credit will take a serious hit. “It ruins your credit and stays on your credit report for 10 years, but surprisingly, you could qualify for prime credit mortgage financing again in as little as two years,” Fleming said.
3. Modify Your Mortgage Loan
A loan modification changes the terms of your loan to make the payments more affordable. Although the government-sponsored Home Affordable Modification Program (HAMP) is expired, the government instructed Fannie Mae and Freddie Mac to establish a Flex Modification program targeting loans acquired by these two government-sponsored mortgage entities. This is worth looking into.
Additional modification choices continue to be accessible via the Federal Housing Administration (FHA) and individual loan servicers. Your lender might have its own propriety program so make sure you ask. Loan modifications are rare these days, Fleming said, but it could be a great option if your lender is open to it.
4. Ask Your Lender To Approve a Short Sale
A short sale happens when a lender allows the homeowner to sell the home for less than they owe on the mortgage. It’s a foreclosure alternative for homeowners who owe more than their homes are worth and who have a documented financial hardship that prevents them from making payments. The lender keeps the sale proceeds, but in some cases, the homeowner receives relocation assistance.
A short sale might be a better option than foreclosure if you’re not too far behind on your home mortgage payments because your credit score will take less of a hit than you’d see with a foreclosure. It’s the long string of missed payments that lead to foreclosure. That said, both short sales and foreclosures get…
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