It’s all too easy to feel alone and ashamed when you fall behind on your mortgage. You don’t tell anyone, you don’t ask for help, and you don’t know what to do.
Yet the truth is nearly 1 in every 17 Americans was behind on their mortgage in December 2020, per data from CoreLogic. And many, many more have fallen or will fall behind at some point in their homeownership.
Borrowers fall behind for any number of reasons. An unexpected job loss, a medical emergency, or a change in marital status are just a few of the issues that can bring about financial hardship. You’re not alone, and it’s far harder to regain control of your finances if you don’t get help.
But where can you turn for help, and what options are available? Before making any rash decisions, take the time to explore all options on the table — because you have more support services available to you than you realize.
Contact Your Mortgage Lender
It’s all too easy to get cynical about mortgage lenders and assume the worst about their intentions. And while their interests often don’t align with yours, in one respect they do: lenders want to avoid foreclosure nearly as much as you do.
Foreclosures are costly for lenders, and they usually come out behind when the loan goes to foreclosure auction. So lenders do everything they can to avoid foreclosing and want to get you, the homeowner, back on track with making payments.
There are several ways lenders can work with you to avoid foreclosure, keep you in your home, and recover the money they lent you.
Reinstatement & Forbearance
One option lenders consider, known as reinstatement and forbearance, involves temporarily reducing or even suspending your monthly payment.
The unpaid mortgage payments don’t simply disappear, however. At the end of the forbearance period, you owe them the outstanding balance in a lump sum.
Still, in the meantime, it provides you breathing room to get back on your feet. And in the interim, the lender reports your mortgage as current to the credit bureaus, so you don’t suffer damage to your credit score.
This option works well for people with fundamentally sound finances who find themselves in a sudden temporary crisis. For example, a homeowner with a sizable salary who faced a medical emergency but will be able to resume work soon is an ideal candidate for reinstatement and forbearance.
Negotiate a Payment Plan
If you had a financial hiccup but are back on your feet and continuing to earn money, you can often negotiate a payment plan to catch up on your payments.
Imagine you lost your job and missed several payments, falling $6,000 behind. You recently found a new job and started earning again and are a strong candidate for a payment plan.
After discussing with your mortgage lender, they agree to let you catch up on the $6,000 overdue balance over the next six months. Once you’re caught up on missed payments, you return to making your regular monthly payment.
Repayment plans hinge on your income and ability to catch up. Convince your lender that you can bring your home loan current if given a chance, and lenders usually offer it to you.
But what happens if you can’t catch up by paying extra?
If you’re earning a regular income, but it’s not enough to pay down your arrears, some lenders agree to modify your loan to avoid foreclosure. Loan modification options vary widely, but the most common include:
- Interest Rate Reduction. In cases when you had been paying a high interest rate relative to current rates, lenders can cut your interest rate to reduce your monthly payment.
- Convert Variable to Fixed Interest. If you’re currently paying a variable interest rate, lenders can change it to a more affordable fixed interest rate.
- Re-Amortize the Loan Term. Another option involves stretching the loan term over a longer period to reduce the monthly payment. Say your loan has 25 years remaining — the lender could re-amortize your current balance over the next 30 years, slimming your payment.
- Extend the Balance. If you owe $6,000 in arrears, it’s simply added as additional principal at the end of the loan.
- Forbear Some of the Principal. One option in re-amortizing the loan is basing the monthly payment on a lower principal balance than you actually owe. The excluded portion doesn’t go away, however. You pay it back as a lump-sum balloon payment at a time determined by your agreement with your lender.
Be prepared to prove you can afford the new monthly payments and that you won’t fall behind again. But the great thing about a loan modification, as opposed to refinancing, is that you don’t incur closing costs.
When you refinance your mortgage, you have to pay all-new title fees, attorney fees, recordation fees, and lender fees (such as origination fees, processing fees, and underwriting fees). It typically adds up to thousands of dollars, which adds to your new principal balance and, therefore, to your monthly payment.
All of that makes it less likely a refinanced mortgage can actually lower your monthly payment, which you’re already struggling to pay.
Still, there are a few programs available to help you secure the lowest possible monthly payment. If you have a Federal Housing Administration (FHA) loan, check out the FHA Simple Refinance program or the FHA Streamline Refinance program, which aim to keep costs low and the timeline fast to help you avoid foreclosure.
Pro tip: If refinancing is a viable option for you, look into Credible. They allow you to compare rates from multiple lenders. You can even get prequalified in just minutes.
Negotiate a Short Sale
You can always sell your home if you find yourself unable to make the payments — unless you’re upside down on your mortgage and owe more than your home is worth.
Many lenders do allow a short sale, however, agreeing to receive a lower payoff at closing than what you owe. They investigate the value of the property, and if they discover you’re truly upside down and the alternative to a short sale is foreclosure, lenders typically prefer a short sale.
The process is usually laden with red tape, however, as lenders require abundant evidence you can’t afford the home and that the property is in fact upside down. They generally send their own appraiser or inspector to verify its value.
Deed in Lieu of Foreclosure
If you genuinely can’t afford to stay, one option is signing over the home to the lender rather than going through the torturous foreclosure process. It saves the lender time and money, and it helps you avoid a foreclosure on your credit.
But it’s an option of last resort, and you should only consider it if foreclosure appears imminent.
Lower Your Escrows
When you take out a mortgage loan, most lenders encourage you to let them escrow for regular expenses like property taxes, homeowners insurance, and homeowners association fees. They pay these on your behalf, adding the costs to your monthly payment.
You may be able to lower these costs, though, thereby reducing your monthly payment.
Buy Cheaper Homeowners Insurance
On the spectrum of homeowners insurance premiums, where does your current policy lie?
Many homeowners don’t know. They picked out a policy years ago when they bought the home and have simply been renewing it ever since.
Take the time to review what your current homeowners insurance covers, its cost, and what you actually need. You could discover you simply don’t need expensive coverage and can save money on homeowners insurance with a cheaper policy.
Companies like PolicyGenius will allow you to compare rates from multiple lenders, help you save money each month.
Appeal Your Tax Assessment
Local property tax assessors frequently overestimate a property’s value.
But no one says you have to accept theirs as the final word. Look up how to file a property tax assessment appeal in your jurisdiction along with any applicable time restrictions. Some jurisdictions only allow you to appeal within a specific window after new assessments to prevent you from doing so.
Likewise, some jurisdictions don’t make the appeals process easy with a simple online application. They require you to send a physical application along with all supporting documentation by snail mail. It’s not in their interest to make this easy on you.
But it’s still worth trying.
Request a Tax Abatement
As a struggling homeowner at risk of foreclosure, you may qualify for a tax abatement.
Tax abatements are temporary suspensions or reductions in property taxes. Local governments offer them for many reasons, but in this case, they may help you avoid foreclosure. Seniors in particular often qualify for specific programs designed to keep them in their homes.
Again, local governments don’t want to make it easy on you, but you can still try.
Private mortgage insurance, or PMI, protects the lender against your default. It adds money to your monthly payment, sometimes hundreds of dollars, and doesn’t help you in the slightest.
If your loan balance has fallen below 80% of your property’s value, you can request that your lender remove PMI. That reduces your monthly payment to keep it more manageable.
But here’s the thing: Most lenders only agree to remove PMI from your loan if you’ve been making your payments on time. So consider PMI removal as a preemptive option — and one that disappears as soon as you stop paying your mortgage on time.
But note you can only remove mortgage insurance from conventional loans, not FHA loans, which require you to pay mortgage insurance for the entire life of the loan.
Negotiate a Plan with Your HOA
Homeowners association (HOA) or condominium association dues further add to your monthly housing costs. And while it can be embarrassing, one other option is to approach the head of your local association and ask for help.
Explain your situation and work out a plan with them. It could involve suspended or reduced payments for a certain period, perhaps with a payment plan to get caught up. But your local association certainly doesn’t want you to face foreclosure.
Their neighborly sympathies aside, it reduces values in the neighborhood. So they may well offer to work with you if you open up and let them know about the troubles you’re facing.
Consider Selling Your Home
No one wants to believe they can no longer afford their home. So they keep telling themselves this month will be different — until they fall so behind on their mortgage they can no longer catch up.
At the start of my career, I worked for a mortgage lender. The owners also invested in real estate on the side, primarily through buying homes scheduled for foreclosure. They would reach out to owners facing foreclosure and offer two options:
They would offer to buy the home outright for a fair price or to buy it for their mortgage balance and let the seller stay as a renter with the option to buy the home back for a small margin.
Almost every single homeowner facing foreclosure took the second option. And nearly everyone ended up being evicted and losing all their equity because they couldn’t afford the monthly payments.
The investors knew they could buy these homes for pennies on the dollar and keep the equity when the seller-renters inevitably defaulted. The saddest part is that it wasn’t even a scam.
They laid out both options in crystal-clear language, knowing that the homeowners would make the wrong choice because it let them stay in their homes a little longer and continue deluding themselves that everything was fine.
Don’t let yourself fall into the same trap. If your total monthly housing costs — including property taxes, insurance, and any association fees — come to more than 25% of your monthly income, expect that to stretch your budget thin.
Every month that goes by digs you deeper into financial trouble. Think carefully about moving into a more affordable home.
Research Homeowner Assistance Options
There are several free resources designed specifically to help homeowners stay in their homes.
If you have an FHA loan, contact the FHA’s National Servicing Center. The FHA will apprise you of all current federal programs available to you.
If you have a conventional loan, visit the United States Department of Housing & Urban Development’s website.
Individuals with VA loans can contact the U.S. Department of Veteran Affairs to discuss additional options available to military veterans.
You can also speak with HUD-approved foreclosure-avoidance counselors in your state. They can assist you with your foreclosure issues. These services cost you little to nothing.
For example, North Carolina offers free foreclosure counseling through its Housing Finance Agency. Other states, such as Minnesota, offer free foreclosure counseling through local nonprofits.
Nationwide, American homeowners can also get help from the federal government’s Making Home Affordable program. Among other resources, they operate a $7.6 billion fund called the Hardest Hit Fund to support struggling homeowners in areas suffering lingering damage from the Great Recession and housing crisis.
All these agencies can help you with programs your lender may not have informed you about. And beyond the financial help, they also help homeowners learn how to recognize and avoid scams.
Beware of Scams
There’s a thriving industry surrounding foreclosures and delinquent mortgages. When you fall behind, you get inundated with letters, phone calls, and emails. But many of them are nothing but mortgage relief and loan modification scams.
The letters, calls, and emails come from lenders offering to refinance you and real estate investors looking to buy your home — if you have equity. They come from attorneys offering to file bankruptcy for you or negotiate with lenders on your behalf (for a fee, of course). Worst of all, they come from “foreclosure specialists,” who promise to save your home for a fee.
These fees can run from a few hundred dollars to a thousand. There’s little most of these specialists can do that you can’t do for yourself. Many homeowners end up losing their homes and money while waiting for a foreclosure specialist to try to save their homes.
Homeowners need to be wary of any individual who contacts them promising to save their home. Contact a lawyer before agreeing to terms or signing any document. Note that some reputable organizations can provide you with assistance. But be sure to check with the Better Business Bureau to see if these companies are legitimate.
The types of financial scams run on delinquent homeowners are too numerous to list, and they continuously evolve. It’s why you must be proactive when you fall behind on your mortgage and initiate contact with verified nonprofit agencies.
Remember, reputable nonprofits don’t generally spend money on initiating contact with you. Direct mail costs marketing dollars, so the letters you get are nearly all from for-profit companies looking to earn money off you.
Start by contacting government-operated agencies to discuss your options, learn about current scams on homeowners, and ask for contact information for verified nonprofits that operate in your area.
What’s at Stake If You Don’t Act
While none of us wants to dwell on the worst-case scenarios, you need to fully understand the consequences if you fail to pay off or catch up on your mortgage.
The first casualty of falling behind on your mortgage is your credit score. One 30-day-late payment on your mortgage can send your score plummeting by up to 100 points, depending on your other credit factors and history. It can take years to rebuild your credit score, even if you eventually catch up on your mortgage payments.
Your lender can also foreclose on your home if you fail to pay. That also shows up on your credit report, causing devastating damage. And that says nothing of the not-so-minor detail that you lose your home.
If you declare bankruptcy, that too lingers on your credit report for up to 10 years. It can make it extremely difficult to get another mortgage, car loan, personal loan, or even credit card.
Beyond the havoc to your credit, any loan modifications, short sales, and foreclosures can all come with nasty tax implications. Uncle Sam adds insult to injury by taxing you on debt forgiveness, classifying it as income.
If your lender accepts a $250,000 short sale payoff on your $300,000 mortgage, the IRS demands that you pay taxes on the $50,000 of forgiven debt.
The longer you wait to get help, the worse the consequences. By being proactive and nipping the problem in the bud, you can prevent the worst damage to your credit and wallet.
The moment you fall behind on your mortgage, reach out to your lender and government support agencies. Many homeowners feel ashamed and ignore the problem, burying their heads in the sand. But it’s the worst possible response when you can’t make your mortgage payment.
You aren’t alone. Get help from nonprofit and government organizations designed specifically to help people in your situation. And the better your communication with your mortgage lender, the more likely you are to negotiate an arrangement that works for you.
Don’t write off the option of selling your home, either. By spending less on housing, you can find your financial footing and return to a high savings rate. There’s no shame in moving into a more affordable home — quite the opposite.
In the meantime, reduce your spending elsewhere to regain control of your budget. Falling behind on your mortgage indicates a financial crisis, so stop spending money on all nonessentials immediately until you’re caught up and the crisis has passed.