Having trouble paying your mortgage?
Don’t panic — you have several options. And you’re not alone.
About 1 out of every 20 American homeowners is behind on mortgage payments, according to recent data from CoreLogic, a financial services firm.
When you need help, your first step is to promptly contact your loan servicer to explain the situation.
“Sometimes dealing with a servicer can be difficult,” acknowledges Ira Rheingold, executive director of the National Association of Consumer Advocates.
He says a housing counselor, including those affiliated with the National Foundation for Credit Counseling, or NFCC, can help you communicate with your servicer and understand your alternatives.
Here are six ways to help you catch up when you’re behind on your mortgage.
Use Bankrate’s calculator to determine how much house you can afford.
Forbearance puts your mortgage on hold temporarily. The payments are suspended or reduced for a time, and you agree to repay with a lump sum or in installments once the pause period ends.
During forbearance, 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.
Repayment: Installments or lump sum
With a repayment plan, you make your regular payment amount, plus extra, for as long as it takes to make up for the late payments.
This is an option for homeowners who have remedied their financial problems and can handle an even larger monthly obligation. “It can work, but know your financial situation,” Rheingold cautions.
If you can pay off the back mortgage payments in a lump sum, the servicer makes your account current and reinstates your loan. Loan reinstatement is a way to stop foreclosure, too. But there could be fees involved.
“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.
Loan modification or refinance
“It brings you current and funds a new payment level that’s affordable to you,” Ribe says.
Loan servicers will want to know your financial problem is 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 straight-up refinance loan for 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.
Same mortgage, lower payments
If you’ve fallen behind because your mortgage payments are too high, there could be solutions that don’t involve your mortgage servicer, says Rheingold.
Shop for a better price on your property insurance to reduce your monthly payment.
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.
Or, do you have enough equity to get rid of the private mortgage insurance, or PMI?
On the other hand, a partial PMI claim could save you if you’re in danger of foreclosure. Rather than pay a full claim to your servicer to prevent foreclosure, the insurance company pays the servicer just enough to cover your missed payments.
You pay it back over time. “The lump sum pays off the (late payments),” says Rheingold, and the bill is added to the back of your mortgage.
If you’re underwater in your loan, principal reduction could be an option. The servicer reduces the principal on your loan, based on its underwriting and the actual value of your house.
This is a better tool for someone who is upside-down in their mortgage than it is for a homeowner who can no longer afford the payments. Fannie Mae and Freddie Mac do principal reductions, but not all servicers will, says Wolff, so ask your lender or servicer.
One loan servicer, Ocwen Financial Corp., offers what it calls a “shared-appreciation mortgage.” After a principal reduction, the borrower retains 75 percent of the home’s appreciated value, while the servicer gets 25 percent, explains Ribe.
The reason servicers do it: A homeowner has less incentive to stay in a house and keep making the payments if the house is worth less than what is owed on it.
Some areas are rich in resources for struggling homeowners. One example is the NC Foreclosure Prevention Fund, in North Carolina.
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, 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.