If you’ve been tempted to skip a few mortgage payments to try to convince your lender to modify your loan, you may want to resist that temptation. Whether your goal is to stave off foreclosure or just make your payments more affordable, experts say deliberate delinquency is not as smart an idea as it may seem.
The bottom line is that:
- If you can make your payment, you should do so.
- If you can’t, you shouldn’t.
- If you’re in between, you should get help to assess your situation.
“Back in the day, (lenders) would only provide modifications to people who were significantly behind because that evidenced that they truly needed the loan modified. They were of that mindset, and they didn’t realize the enormity of the problem,” says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md. “But now, they’ve realized that the logic of making someone become delinquent and dig a deep financial hole before you help them was really not good for anyone.”
Loan modifications extended to nondelinquent borrowers
That new thinking can be seen on some, though by no means all, of the lenders’ Web sites, which have been updated to suggest, however subtly, that a late payment may no longer be a prerequisite to a loan modification. Here are two examples:
- Chase’s Web site states: “If you are current on your mortgage, but have had (or are facing) a change in personal circumstances, such as an uncontrollable reduction in income or increase in payment that will create a financial hardship, and feel you are at risk of losing your home, your next step will be to determine if you may qualify for loan modification.”
- Bank of America/Countrywide’s Web site states: “If you think you might fall behind on your payments or have already missed a payment, our specialists will work with you to determine your eligibility for one or more of these potential solutions: refinancing, extending the term of the loan, interest rate reductions, temporarily freezing monthly mortgage payments, extended repayment schedules (or) decreasing the principal balance of the loan.”
Christine Holevas, a spokeswoman for JPMorgan Chase in Chicago, declined to comment on whether homeowners should make a late payment to better their odds of a loan modification. But she reiterated the standard advice that you shouldn’t wait until you’ve missed a payment to contact your loan servicer. Instead, you should pick up the phone as soon as you believe you may be in danger of delinquency.
“If you think you’re in trouble, contact your servicer. You do not have to be late. You do not have to have missed a payment. Contact your servicer so they will know and they can start the process,” she says.
Missed payments disqualify borrowers
The federal government’s new Making Home Affordable plan may be another reason why lenders have tweaked their policies with respect to delinquency and loan modifications. The new plan, which includes a loan modification program and a refinance program, offers lenders new incentives to participate.
The loan modification program is open to borrowers who have missed one or more payments, but a missed payment is not a requirement. In fact, the FAQs for this program state that “responsible borrowers who are struggling to remain current on their mortgage payments are eligible if they are at risk of imminent default.” Risk of default might involve a mortgage payment that has reset and is no longer affordable, a significant loss of income or other types of hardships.
The refinance program is open only to homeowners who haven’t made a payment more than 30 days late within the past 12 months. The FAQs for this program state that “borrowers who are currently delinquent or have been 30 days overdue more than once during the past 12 months will not qualify.” That means if you deliberately missed a mortgage payment, you likely disqualified yourself from this program.
Missed payment wrecks credit score
If you’re still tempted to skip a payment, you should be aware that that choice will harm your credit score, says Craig Watts, public affairs manager for FICO in San Rafael, Calif.
Credit scores weigh the recency, severity and frequency of your delinquent accounts, Watts says. That means the more recent a missed payment is, the greater the negative effect on your score. Payments made more than 90 days late — or never — will cause the most damage, and a pattern of delinquent accounts will hurt more than an isolated incident.
A lower credit score might seem a small price compared with the prospect of a cheaper mortgage payment. However, that lower score will cause consequences that shouldn’t be taken lightly. If your score drops, you’ll have more difficulty refinancing your mortgage, getting a car loan, obtaining new credit cards or opening new accounts at department or retail stores. You also could be required to make cash deposits to obtain utilities, cable television or cellular phone services, Watts says. The favorable terms you’ve enjoyed on your existing credit accounts could be altered to your detriment as well, Cunningham says.
What’s more, if you willfully skip a mortgage payment, you’ll still owe that amount, plus additional interest and penalties that can add up fast. If you miss several payments, you might not be able to recover financially even if your lender modified your loan. And if you eventually lose your home due to foreclosure, you might not be able to rent another place to live once your credit score has been damaged.
Long-term sustainability is key factor
But suppose your financial situation is such that you cannot make your mortgage payment and must conserve cash. Should you sell your car, borrow money from your family, tap into your retirement accounts or resort to other one-time fixes to make sure you don’t miss a payment even if foreclosure is a near certainty or the financial or emotional burden of your house payment is insupportable?
The answer depends on your own unique situation, but the anticipated duration of your financial setback and what Cunningham calls the “long-term sustainability” of your loan should be important considerations. For example, if you’ve lost your job but expect to find another position quickly, you might want to find a way to get over the high tide and keep your home. On the other hand, if your situation isn’t that easily mended, you might not want to take such drastic measures.
Perhaps the best advice for homeowners who are caught in a conundrum of whether to make their mortgage payment or give priority to a credit-card bill or other financial obligations is to get help. Cunningham says homeowners should consult a mortgage counselor who has been trained and certified by the U.S. Department of Housing and Urban Development. Counseling services are provided free of charge by nonprofit agencies.