Behind on your mortgage? 6 ways to catch up

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Now that the coronavirus pandemic is putting millions out of work and cutting into the paychecks of millions more, many of these people will have trouble paying their mortgages for months.

Don’t panic. You have several options. (Specific advice on state and federal programs to help homeowners during the pandemic can be found here.

Before the pandemic, about one out of every 20 American homeowners had been behind on their mortgage payments at one time or another, according to data from CoreLogic, a financial services firm. But now that corona is slicing into the economy, this number will most certainly rise.

If you’re falling behind on your mortgage payments because of the pandemic or for other reasons, it’s important to seek help now. The first step is to contact your loan servicer to explain your situation. Many are reluctant to take this step because they are scared and intimidated–for good reason.

“Sometimes dealing with a servicer can be difficult,” acknowledges Ira Rheingold, executive director of the National Association of Consumer Advocates. Yet, Rheingold says, a housing counselor, including those affiliated with the National Foundation for Credit Counseling, can help you communicate with your servicer and understand your alternatives.

Taking constructive action is important to avoid foreclosure. Here are six ways you can catch up when you’re behind on your mortgage.

1. Forbearance

Forbearance puts your mortgage on hold temporarily. The payments are suspended or reduced for a set period, and you agree to pay with a lump sum or through installments once the pause period ends. During the forbearance period, the record reflects that you’re current on your mortgage.

This option tends to be the best fit for “people facing a short-term financial hardship or disruption of income,” says Matt Ribe, senior director of legislative affairs with the National Foundation for Credit Counseling.  “It’s simply a way to stall payments without being considered delinquent.”

This option doesn’t involve underwriting or much work on the servicer’s part. The downside is you’ll pay more interest by effectively stretching out your mortgage term.

2. Repayment through installments or a lump sum

This is a way that homeowners can pay overdue payments after their financial situations improve–if servicers allow it. With a repayment plan, you make your regular payment amount, plus an additional amount, for as long as it takes to make up for the late payments. Of course, servicers must be convinced that your financial situation has improved to the point where you can handle a larger monthly obligation.

This may be an option for homeowners who have remedied their financial problems and can handle an even larger monthly obligation. “It can work, but [you must] know your financial situation,” Rheingold cautions.

If you can pay back mortgage payments in a lump sum, the servicer makes your account current and reinstates your loan. But fees may up the total. “You may need a lot of money to make that happen,” says Rheingold.

The challenge is coming up with a big chunk of money. And borrowing it is probably not a good strategy if you’re just recovering from financial woes.

3. Loan modification or refinance

A loan modification is almost like a refinancing. You get a new loan with a longer term or a lower interest rate.

“It brings you current and funds a new payment level that’s affordable to you,” Ribe says.

Loan servicers need to be convinced that your financial problems are behind you. “They want to make sure the borrower can afford that payment,” says Wolff.

Typically, you have to meet some criteria, such as proving a financial or personal hardship.

Some mortgage servicers will green-light a refinancing for financially troubled homeowners. A refi does require underwriting and some work on the servicer’s part. But the servicer already has all your documentation and “can do it fairly quickly and cheaply,” Rheingold says.

4. Same mortgage, lower associated payments

Another route is to seek to lower the costs associated with owning a home. One is to shop for a better price on your property insurance to reduce your total monthly home-related costs.

Another is to find out whether you’re eligible for property tax abatements in your area, says Rheingold. Especially for seniors, this can lower your monthly mortgage payout.

Another option is to seek to end your private mortgage insurance (PMI), so you can get out from under this payment. If you’ve built up enough equity in your home, this may be possible. All too often, homeowners let this payment go on longer than necessary. If you haven’t eliminated it already, your financial troubles may be the impetus for doing so.

However, PMI can sometimes be used to save your home if the servicer is threatening to foreclose. In this event, you can file a partial PMI claim. Rather than paying a full claim to your servicer to prevent foreclosure, the insurance company pays the servicer just enough to cover your missed payments. To see if this would work, read your PMI policy documents carefully or consult a real estate attorney.

5. Principal reduction

This is when the servicer is able to reduce the principal on your loan, based on underwriting and the actual value of your home. This can reduce the amount you owe on the loan, so it can reduce your monthly payments. Principal reduction was used by many homeowners whose finances got clobbered by the financial crisis of 2008-2009. More homeowners will probably be seeking principal reductions soon because of hardships from the economic effects of the corona pandemic. Yet for them to use this option, the numbers must work out, because services and lenders need protection.

Fannie Mae and Freddie Mac do principal reductions, but not all servicers will, says Wolff, so ask your lender or servicer.

6. Local resources

Some areas are rich in resources for struggling homeowners. One example is North Carolina, where an available resource includes the Foreclosure Prevention Fund.

Homeowners with a financial hardship can get help creating a repayment plan or have the NC Foreclosure Prevention Fund cover three years of mortgage payments while the homeowner retrains and gets a job in a new field, says Phyllis Caldwell-George, housing division director for Financial Pathways of the Piedmont, an affiliate of the NFCC. The program is also open to returning members of the U.S. military.

The fund helps seniors keep their homes by paying down a portion of the mortgage principal, so that they can re-amortize their loans and get a lower monthly payment, she says.

In six and a half years, the NC Foreclosure Prevention Fund has helped 22,000 homeowners and saved almost $4 billion in homes, says Caldwell-George.

Check in with a local NFCC member group to find out what resources are available in your area.

Use Bankrate’s calculator to estimate your monthly mortgage payment.

With additional reporting by R.H. Bierck.