You can do everything right. You can save for years and keep your credit score pristine. You can find an affordable house and use a house payment calculator to budget for the future. You can do all that and more and still find yourself unable to afford the cost of your mortgage.
Maybe you lost an important source of income. Maybe an unexpected accident demolished your savings. Maybe the stock market took a hit and your investments went sour. Whatever the case, you’re running out of time and money. That doesn’t mean foreclosure is inevitable, though, as long as you know your options.
Don’t Delay or Miss Payments
The first mistake that most people make when their mortgage starts to outpace their ability to pay it is making late payments or, worse, no payment at all. Nothing good ever comes of this. Delaying and missing payments only increases the interest you owe while decreasing the amount of goodwill you have with your lender. If you’re worried about falling behind, don’t waste a second; contact your bank to see if you can get some leeway or to begin negotiations to refinance your loan.
Talk to the Bank about Refinancing
If you’re in good standing with your bank and have a credit score of around 620, most lenders will allow you to refinance your loan. This basically means trading in your previous mortgage agreement for a different one, usually one with more affordable payments made over a longer period of time. Not only will this provide much-needed financial relief, but refinancing is a good way to preserve your credit rating.
Try Making Loan Modifications
An alternative to mortgage refinancing is loan modification. On the surface, these two avenues are very similar, but under the hood there are some subtle yet significant differences. Instead of terminating and applying for a new, different mortgage, loan modifications simply alter the terms of your existing mortgage. Loan modifications go into effect more quickly than refinancing, making them a good option in times of crisis. However, they do have a downside in that they negatively impact your credit score.
Propose a Forbearance Agreement
If the situation surrounding your mortgage is past the tipping point—meaning that the bank is in their legal right to put your home into foreclosure—forbearance can help. A forbearance is when you and your lender come to an agreement where they will not act on their right to foreclose in favor of giving you time to get your finances in order. When the 180-day forbearance period ends, you will be expected to resume payments as if there had been no interruption.
Don’t Rule Out Bankruptcy
Declaring bankruptcy is something many people dread. Despite that, it can actually be a blessing in disguise. Despite the negative connotations, the purpose of bankruptcy is to protect people in precarious financial situations, not hurt them. Depending on what form of bankruptcy you qualify for, your home may be exempt from asset seizure entirely.