Even though the economy is in the process of recovering from the financial crisis, many people find they can’t make their home mortgage payments. People fall behind on their home mortgage for a number of reasons – loss of job, reduction in income, divorce, illness or death of a spouse. To complicate matters, many homeowners are underwater. They owe more on their mortgage than what their home is worth.
If You Can’t Pay Your Home Mortgage, What Are Your Options?
Homeowners who can’t pay their mortgage often feel powerless, but it’s important to realize that you do have options. Here is a list of the choices available to you when you are not able to pay your home mortgage. The option that is best for you depends on your own circumstances and financial goals. We are happy to schedule a free attorney consultation to help you review each option and make the best informed choice for your situation.
Option #1: Rent out the property.
This may work for people who are relocated because of work. If the rent you receive for your home can cover your mortgage expense, taxes and other costs, this may be an option. Be sure to take into account that your home may be vacant at times. You will also need to include expenses for your own new housing in your budget.
Option #2: Refinance your home mortgage.
If you have equity in your home, you may be able to refinance your home mortgage with a new loan that has lower monthly payments. Unfortunately, refinancing is not available to borrowers who are underwater on their mortgages.
Option #3: Get a home loan modification.
A home loan modification is a permanent adjustment made to your existing loan. It’s important to know that lenders rarely reduce the total balance owing on the loan. Usually, a home loan modification will involve dropping the interest rate to make monthly payments more affordable. It often will also involve extending the length of the loan. While this does lower monthly payments, you also end up paying many thousands of dollars in extra interest over that extra time.
The home loan modification process can take months. Banks are huge entities, and often the left hand doesn’t know what the right is doing. It’s not unusual for one department to be reviewing your request for a loan modification while another department is beginning the foreclosure process. If you decide to pursue a home loan modification, always have a Plan B in place.
Option #4: Talk to your lender about forbearance.
Forbearance is a temporary suspension or reduction of home loan payments. A lender will probably only grant forbearance if the hardship causing the borrower to miss payments is temporary, and if you have not missed any home mortgage payments prior to that hardship. Examples of temporary hardships include loss of income due to a medical condition, or costs resulting from a natural disaster. Forbearance will usually only be granted for periods of three to twelve months. At the end of that period, the borrower will be expected to make up all of the missed payments, either by paying them all at once or through a repayment plan.
Option #5: Request a repayment plan.
You can approach your lender about creating a payment plan to make up your missed home mortgage payments. A lender is unlikely to approve a repayment plan unless they’re convinced that you can make those repayments. A repayment plan may work for someone who missed home mortgage payments because they were laid off, but who have since returned to a well-paying job.
Option #6: Pursue a short sale.
A short sale is the sale of a property for less than what the owner still owes on the mortgage. The lender agrees to accept less than the amount owed to pay off a loan, and in most cases you will never have to pay the balance. Lenders agree to a short sale because they believe it will net them more money than going forward with a lengthy and costly foreclosure process. Both owners who live in their home and real estate investors can qualify for a short sale if they meet certain criteria, including a qualifying hardship.
A short sale is the preferred option for many homeowners because it provides a permanent solution to their mortgage problem, and has less impact on your credit score than foreclosure. When you want to obtain a loan to purchase a property in the future, more opportunities will be available to you if you do a short sale rather than foreclosure. Most homeowners we work with that can’t make their home mortgage payments find that a short sale allows them to sell their underwater home, and walk away with more options for getting a fresh start.
Option #7: Choose a Deed in Lieu (DIL)
A Deed in Lieu of Foreclosure is also known as voluntary foreclosure. The homeowner voluntarily transfers the deed of the property back to the lender and hands them the keys to the home. DIL is generally a last resort. The only value of DIL over foreclosure is that is saves you the stress of having to go through the foreclosure process, and the affect your credit score may be less than going through foreclosure.
Option #8: Declare bankruptcy.
Declaring bankruptcy can stop a foreclosure. In Chapter 7 bankruptcy, if your equity in your home is below a certain amount, you may be able to keep your house. One advantage of bankruptcy is that you resolve not only your home mortgage debt, you resolve all your debts. Bankruptcy can carry a stigma, and it is not for everyone, but it should be examined as an option.
Option #9: Wait for foreclosure.
If you stop making home mortgage payments, and don’t communicate with your lender, it will lead to foreclosure. Foreclosure is a legal process where the lender seizes your home because of unpaid debt. While you will be living in your home without making any mortgage payments, you don’t know when you’ll be forced to leave. You will also be dealing with phone calls from creditors, having notices posted on your home, and having friends and neighbors know you have been foreclosed upon. Foreclosure also has a significant impact on your credit score – usually 250 to 300 points that remain on your record for seven years. You need to decide if living rent-free for a while is worth the stress for you. In general, our clients usually decide against foreclosure because of the stigma, stress and long-term damage to their credit.
Which home mortgage solution is best for you?
The right solution depends on your unique situation. We are happy to provide you with a free attorney consultation to discuss all the options and come up the best plan for your circumstances.
Call us at 425-381-2233, or email us
to schedule your no-cost, confidential, attorney consultation
Other helpful resources:
About Our Free Attorney Consultations
The Benefits of a Short Sale Over Foreclosure
Beware Home Loan Modifications
Short Sale FAQs
What is a Short Sale Hardship?
More Testimonials from Our Clients
Short Sale Hardship Letter Samples