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With interest rates rising in an effort to curb inflation and recession fears escalating, you may find yourself worrying about what happens if you fall behind on your mortgage.
The percentage of mortgages 30 or more days delinquent but not in foreclosure edged up to 1.89 percent in July 2022, according to data firm Black Knight. While the rate is relatively low, if we do end up in a full blown recession it will certainly skyrocket.
If you’re falling behind on your mortgage payments because of inflation blowing up your budget, 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.
Taking constructive action is important to avoid foreclosure. Here are six ways you can catch up when you’re behind on your mortgage.
Best for people facing a temporary hardship or loss of income
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 (NFCC). “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
Best for people who are back on their financial feet and want to catch up
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.
“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 NFCC, can help you communicate with your servicer and understand your alternatives.
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.
Best for people who have the money to resume payments but need help to catch up
A loan modification is almost like a refinancing. You get a new loan with a longer term or a lower interest rate. With a loan modification you can avoid another round of closing costs and a potentially higher interest rate you would get with a refinance. You can check current refinance rates here and estimate what a refinance would cost you with Bankrate’s refinance calculator.
“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
Best for people who just need a slightly reduced payment to catch up
Another route is to seek to lower the costs associated with owning a home.
- Property insurance: Shop for a better price on your property insurance to reduce your total monthly home-related costs.
- Property tax abatement: 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.
- Private Mortgage Insurance (PMI): Contact your lender and see if you have enough equity to get rid of private mortgage insurance (PMI). If you’re eligible to have it removed, you’ll see an immediate drop in your monthly payments.
Keep in mind that 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
Best option if your lender will do it
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.
Fannie Mae and Freddie Mac do principal reductions, but not all servicers will, says Wolff, so ask your lender or servicer.
6. National and local assistance funds
Best for people who qualify
Nationally there is help available through the US Department of Housing and Urban Development’s Making Home Affordable program and the Homeowner Assistance Fund, a $9.9 billion dollar fund created by President Joe Biden that is administered in all 50 states and D.C.
In addition to national programs, 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.
Check your state, county, city and any professional organizations like a union you may belong to and see what assistance programs are available.
Foreclosures are more common than you think and being ashamed of falling behind on payments is not going to help you. As tempting as it is to ignore the problem and hope it goes away, that will not work.
There are dozens of programs and laws in place to help you stay in your home. No matter how bad it’s gotten you must contact your lender right away and start the process to avoid foreclosure. You’ve been making payments diligently and a temporary hardship doesn’t have to make your family homeless. You deserve to stay in your home. Use the resources available to you, that’s what they’re there for.