What Happens if You Can’t Make Mortgage Payments During a Recession?

woman on the phone looking slightly concerned while holding papers

When a nation enters a recession, that means there's been a serious drop in economic activity. That typically translates into economic struggles for many, including job losses or reduced income.

But bills—including your mortgage payment—will continue to come due, and you'll still be responsible for paying them. A mortgage lender may, however, agree to suspend or reduce your payments or hold off on foreclosure if you're experiencing a financial hardship. There may even be special measures put in place to help homeowners in regions where the economy has been affected by a natural disaster, such as we're seeing with the ongoing coronavirus pandemic.

Whether you're still on solid financial ground or uneasy about the future, it's worth taking the time now to understand what help is available should you run into trouble keeping up with your mortgage payments. Your own circumstances will determine what financial steps you should take during an economic downturn like a recession. Here's what you should know.

What to Do if You Can't Pay Your Mortgage

If you find yourself unable to make your mortgage payments, your first step should be to contact your mortgage servicer or lender. The companies that manage mortgages are aware that life can throw curveballs and are often willing to work with borrowers to avoid late payments and foreclosure.

The sooner you can reach out to your lender, the better; you may have more options in front of you if there's some time left before your payment's due. Depending on your situation and the policies offered by the servicer or lender, mortgage relief options might include:

  • Forbearance: This happens when a mortgage lender or servicer suspends or reduces your mortgage payments for a certain period of time while you get your finances back in order. Keep in mind that those payments won't be wiped out completely and you'll be required to catch up with your payments at some point in the future. Under the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 and subsequent extensions, you can receive up to 18 months of forbearance if you've suffered financially because of the coronavirus pandemic, as long as you have a federally backed mortgage. If you don't have a federally backed mortgage, your mortgage company still might be able to provide forbearance.
  • Foreclosure relief: In some situations, a mortgage lender or servicer might be prohibited from foreclosing on your home. For instance, foreclosures are banned through June 30, 2021, for homeowners with federally backed mortgages who were financially hurt by the coronavirus pandemic. Check with your mortgage servicer or lender about its foreclosure rules.

Consider Refinancing Your Mortgage if You Have Good Credit

If you aren't able to arrange some sort of forbearance, but still have good credit, you might ease your financial situation by refinancing your mortgage. Mortgage interest rates tend to fall during times of recession, which means refinancing could net you a lower monthly payment that makes it easier to meet your financial obligations.

You stand a better chance of your application being approved if you've got good credit. In general, that'll require a credit score of at least 620 for a conventional mortgage refinance. However, some government programs lower the minimum score to 580, or don't require a minimum score at all.

Other factors a lender will consider when you apply for a mortgage refinance loan include:

  • Your credit score and credit history
  • Current debts
  • The payment history on your current loan
  • Your income and employment history

Build a Budget and Consider Adjusting Your Spending Habits

When you're juggling various financial worries during an economic downturn like a recession, it can be easy to overlook the need to create a household budget. But a budget can help you better navigate rough economic waters and can point you in the right direction when it comes to adjusting your spending habits.

Fortunately, it's pretty simple to set up a budget. Whether you use old-fashioned paper and pencil, a spreadsheet or a budget app, coming up with a budget enables you to:

  • Examine your income and expenses
  • Set financial goals (like saving money for retirement)
  • Track and trim your spending

Perhaps harder than creating a budget is sticking to it and adjusting your finances accordingly. Having a budget is all well and good, but if you're consistently blowing past your spending goals it's not going to help you make a difference in your savings. At the end of every month, compare your expenses with your budget and make the necessary hard decisions it'll take to cut back, or look for ways to increase your income.

Focus on Your Emergency Fund

Establishing a budget also can allow you to focus on starting or adding to your emergency fund. An emergency fund offers certainty during a recession, when your job and your income might be in jeopardy. If you've stashed enough money in your emergency fund, you're better equipped to weather a financial storm and cover your everyday expenses, including your mortgage payments.

Of course, it's ideal to set aside money in an emergency fund before it looks like the economy is heading into a recession. But if you still don't have an emergency fund, it's smart to consider starting one during a recession if you can afford it. What if you already have an emergency fund? Keep putting money into it while your finances are stable—you may be grateful later.

Here are four tips for creating an emergency fund:

  1. Look at what you spend on the necessities, such as your mortgage, car payments, utility bills and grocery bills. Generally speaking, an emergency fund should contain enough money to cover these expenses for three to six months.
  2. Sell unused stuff to raise money for your emergency fund. At a garage sale, through online ads or with marketplace apps, you can generate cash from unwanted things like clothing, furniture and kitchen appliances.
  3. Switch on automatic transfers. You could have money automatically transferred from your checking account to a special savings account every payday, for example. This set-it-and-forget-it method can help you build up your emergency fund with little effort.
  4. Save extra cash. Did you receive a substantial tax refund? Sock it away in your emergency fund.

The Bottom Line

When a recession hits home, you can seek help from your mortgage servicer or lender if you're finding it hard to keep up with your payments. They might be able to suspend or reduce your monthly payments for a certain amount of time—as long as you ask.

Furthermore, a recession opens the door to reevaluating your overall finances and preparing for immediate or future monetary hurdles. It can be a perfect time to look at refinancing your mortgage to lower your payments, setting a household budget and creating an emergency fund.