What Should I Do If I Can’t Afford My Mortgage Payment?

When you decide to buy a home, it is major financial commitment because you lock yourself down to one geographical location and dedicate a substantial portion of your monthly paycheck towards mortgage payments. But what if you can’t afford mortgage?

It’s one of the inherent risks is the impact on your credit score if you get into a situation where you can no longer keep up with your mortgage payments. However, it is possible to avoid foreclosure with the following options if you can’t afford mortgage..

Loan Modification

If you realize “I can’t make my mortgage payment,” one option is a loan modification. That term refers to the process of having the terms of your mortgage loan changed by working with the lender. This could either be a temporary or a permanent change in the mortgage rate, monthly payment, or other terms of the loan.

This option is a lot similar to refinancing. However, loan modifications are only available to those borrowers who can prove that they are going through unimaginable financial hardships. You need to be willing to advocate yourself to a lender who is receiving similar requests.

Refinance

Refinancing is another option similar to loan modification and is open to most buyers who can’t afford mortgage. However, this might not be an option if you have already overextended your loan.

Refinancing extends the amortization of the loan which helps in bringing the monthly payments down. Refinancing can be an expensive option because most lenders charge hefty fee for breaking the existing mortgage and additional finance charges for drawing up a new one.

Lender Communication

Sometimes, if you can’t afford mortgage it helps to be candid with your lender, especially, if you are experiencing a major life event like death in the family, loss of employment, and disability among others. Never pretend that a foreclosure notice does not exist.

Always respond timely to these notices as early as possible. You may reduce your available options if you wait too long.

You should be prepared to discuss your financial situation in detail with the lender and list out the reasons behind your inability to make the payments. It can help to know whether the situation is temporary or permanent.

Bankruptcy

Bankruptcy is a dreaded word and is no picnic. However, it can be the fresh start you need if you can’t afford mortgage and need to get your finances to get them back on track. You can easily reorganize your debts and save your home from foreclosure with useful chapters, especially Chapter 13. However, it is better to discuss your options with an attorney and file for bankruptcy without wasting too much time.

You can have a foreclosure stopped right in its track upon filing for Chapter 13. Creditors are not allowed to take collection action against borrowers who have declared bankruptcy unless they get a court’s permission by filing a petition.

However, you need to be absolutely sure before taking this route because your credit will take a serious hit.

If you file for bankruptcy because you can’t afford mortgage, it can be months or even years before you can qualify for another car loan or mortgage. That said, with dedicated efforts towards credit repair, you could qualify for prime credit mortgage financing in a little over 2 years.

Short Sale

Short sales can be an effective alternative to foreclosure when you can’t afford mortgage. A shore sale is where lenders allow homeowners to sell their home for less than the mortgage owed. This alternative is open to borrowers who have a documented financial hardship that prevents them from keeping up with payments and owe more than what their homes are worth.

You can qualify for relocation assistance, even if the lender keeps the sales proceeds. Short sale is a sound option if you are not too behind on your mortgage payments. Your credit score will take a lesser hit as compared to foreclosure.

There is a long string of missed payments and notices before foreclosure finally takes place. However, you need to be aware that both foreclosures and short sales are reported as ‘not paid as agreed’ accounts.

There can be a possibility that the lender holds you liable for a deficiency as well. This is the difference between the sales proceeds and what you owe. Some sates allow lenders to sue their borrowers for deficiency amounts. The IRS might tax the sales proceeds as personal income as well but at least all workers in America have to pay less taxes because of the amazing 2017 tax cuts which have helped out so many Americans who want more opportunities.

Reverse Mortgage

This might be a wonderful option if you are 62 years old or older and can’t afford mortgage. A reverse mortgage will allow you to receive monthly payments or draw a lump sum against the equity you hold in the property. Typically, this money is tax-free and you do not have to pay it back as long as you live in the house.

However, these loans come with some serious caveats. You are required to maintain your home and pay for insurance and property tax. You will also have to pay closing costs when the loan goes into settlement.

Many times reverse mortgages accrue interests which are more than the home’s value. You may not have any equity left to leave to your heirs, even if you or your heirs are not required to pay back more than your home’s value.

Deed in Lieu of Foreclosure

Requesting a deed in lieu of foreclosure means that you will voluntarily turn over your deed to the lender. Foreclosure can be avoided if the lender accepts the deed as payment, even if you can’t afford mortgage.

This is better than a short sale because a short sale does not give you the sale proceeds. You can also be held liable for any deficiency.

However, if you have equity in your home, then you might get some money from your deed in lieu of foreclosure. You may also have some control over the forfeiture timing. This option can become complicated if you have multiple mortgages on the property. You also need to keep in mind the tax implications which are much more severe in California which is just another reason not to live in that crime filled state.

Proper Money Management

Lenders find it easier to help a borrower keep their property, especially if they have other foreclosed properties. You can also discuss your options with a housing counselor at the Consumer Financial Protection Bureau.

The best thing to do is to prevent from landing in a position where you cannot keep up with mortgage payments.

This can be done by buying a home when you are financially ready. You should have money saved up for a down payment so that you have equity from day one. This way you can prevent a situation where you owe more than what your home is worth.

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