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If you find yourself unable to cover your monthly mortgage payment, it's important to act quickly. This starts with reaching out to your lender and exploring options to protect your home, finances and credit.
A late mortgage payment, like any late loan payment, typically costs you in penalties or fees, and if your payment is 30 days late, your mortgage lender will report a delinquency to the national credit bureaus (Experian, TransUnion and Equifax). That causes a negative entry to appear on your credit report, where it will remain for seven years.
Even one delinquent payment can lower your credit scores significantly, and successive missed payments can have a cumulative impact. The negative effect of missed payments lessens over time, but three missed mortgage payments in a row can be grounds for a lender to begin foreclosure, the process of seizing and reselling the home.
If you are concerned you might miss a mortgage payment, consider pursuing one or more of the following options to avoid the expense, pain and negative credit consequences of a foreclosure. Which action is most applicable to you depends on the reasons for your financial strain, whether you expect those challenges to be temporary or indefinite, and what makes the most sense for you and your family.
If you can't pay your mortgage because of temporary financial hardship, you can ask your lender for mortgage forbearance, which reduces or even suspends your mortgage payments for as long as 12 months until you can resume your payments.
If you are granted forbearance, the lender will agree to refrain from foreclosure during the forbearance period. Keep in mind that you'll be expected to repay any payments that were suspended (or late) during that time, typically in a lump-sum payment or through a repayment plan.
If your credit is good, taking out a new mortgage with a lower monthly payment could make your house payments more affordable. Generally, refinancing works best if you have at least 20% equity in the home (so you can avoid mortgage insurance on the new loan) and you can get a new loan at a substantially lower interest rate than you have on your current loan.
The refinancing process can take weeks or even months, and you will likely have to pay (or finance) origination fees associated with the new loan. If you've already missed payments on your current loan, it could hurt your chances of approval on a new mortgage.
3. Mortgage Modification
In the mortgage modification process, your mortgage lender permanently adjusts the terms of your loan to make your monthly payments more manageable. This typically extends the length of your loan by several months (and payments), which means the loan will cost you more in interest payments than it did under the original payment schedule. You may feel this is a worthy trade-off if you hope to keep your home.
Lenders are under no obligation to grant mortgage modifications, and typically do so for customers with strong credit who can show they'll be able to keep up with payments under the new loan terms.
4. Sale of the Home
If the home is worth more than you owe, selling it may make the most sense financially. In current real estate markets, a home in good condition may sell relatively quickly.
Just keep in mind that any mortgage payments you miss during even a speedy sale process can have a significant negative impact on your credit reports and scores. If possible, try to keep up with all of your payments while you work to sell your home.
5. Renting Out the Home
If you can move in with friends or family at little or no cost, renting out your home could be a good option as long as you can collect enough rent to cover your mortgage payments. Before becoming a landlord, keep in mind the following things:
- As a landlord, you'll typically pay increased property insurance costs on the property.
- You'll still be financially responsible for home maintenance and repairs.
- You'll need to arrange to repay any mortgage payments you miss while setting up the rental.
Additionally, if you go into foreclosure after renting out the property, the tenants could have grounds to sue you.
6. Short Sale
Under a short sale, the lender agrees to let you sell your home and to accept the sale amount (even if it's less than what you owe) in exchange for settling your loan. Like other loan settlements, a short sale will appear as a negative entry on your credit report and will likely lower your credit scores.
A short sale does less damage to credit than foreclosure and may help you avoid paying a deficiency judgment—a kind of penalty awarded lenders in some states when collateral on a loan is worth less than the amount of the debt. Note, however, that some states consider forgiven deficiency judgments to be taxable income.
7. Deed in Lieu of Foreclosure
Under a deed in lieu of foreclosure, you agree to vacate the home and turn the keys over to the mortgage lender in exchange for the lender releasing you from your mortgage obligations. This can be less costly and time-consuming than the foreclosure process and may even include a "cash for keys" arrangement that gives you some money to use to pay for a new place to live.
As a form of debt settlement, deed in lieu of foreclosure has negative consequences for your credit, but they are typically less severe than those of foreclosure.
The Bottom Line
Struggling to pay your mortgage or any other bill is never pleasant, and neither are all the options listed above. Some may require you to give up your home, others may harm your credit and a few do both. But if you're in survival mode, sometimes the best you do is try to contain the damage and take the option that leaves you in the best position to start over.
No matter how dire your financial outlook may be, being decisive and proactive can help you avoid foreclosure or bankruptcy and move you closer to getting back on your feet, whether it's in your current home or another one waiting up ahead. Having a good idea of where your finances stand can help. You can get free credit monitoring from Experian to help you understand factors that impact your credit and how you can improve your credit, even during challenging times.