If you have recently lost your job and are now unable to pay your mortgage, there are steps you can take to resolve this problem before your home is repossessed. The key is to be proactive with your mortgage lender; do not ignore the issue until you start receiving collection notices or calls. By taking action now, you will not only have more options before you, but you may end up saving your home from foreclosure. Here are 4 basic steps you can take to address the issue of being unable to pay your mortgage:
1. Do your research.
Calculate your current income and living costs, including how much you spend on utilities, credit card bills, insurance, transportation, etc. Then, locate your original mortgage documents and the terms of your mortgage loan. Once you have gathered this information, call your mortgage lender and work with the agency to figure out a more reasonable payment plan. If your lender will not work with you, or if you are not comfortable discussing your finances with your lender, contact a third party housing or credit counseling intermediate. There are many counseling service agencies listed at the NeighborWorks and U.S. Department of Housing and Urban Development (HUD)’s web sites.
2. Know the law.
The government realizes that times are tough for many individuals and families and has passed provisions to help those who are in need of assistance. The Making Home Affordable Modification Program (HAMP) may help you if your current home is your primary residence, if you owe less than $729,750 on your first mortgage, if you obtained your mortgage before January 1, 2009, if you pay over 31% of your current gross income on your mortgage, and if you cannot afford your mortgage because of a recent financial hardship, such as a lost job or high medical bills.
3. Know and discuss your options.
You have several options when it comes to keeping or getting rid of your home. If you intend to keep your home, you should discuss the following options with your lender:
Forbearance: The lender may temporarily reduce or suspend your mortgage payments for a short period of time (e.g., 3-4 months). After that time, the lender may set up a new payment plan. You may qualify for forbearance if you’ve recently experienced a significant reduction in your income (e.g., job loss) or an increase in your expenses (e.g., medical bills).
Reinstatement: The lender may “reinstate” your loan if you promise to make up the back payments by a set time. Reinstatement is often coupled with forbearance and with a repayment plan.
Loan modification: The lender may change the terms of your loan in order to make your payments more affordable. Those terms could include the amount of money paid each month, the length of the loan, and the loan’s annual percentage rate (APR). There is a processing fee involved with a loan modification.
Partial claim: If you have your current mortgage insured by a private insurance firm, the mortgage lender may help you file a claim with it. Other insurers may provide a one-time interest free loan to you so that you can make up your back payments. That loan will need to be repaid once you refinance, pay off your mortgage, or sell your home.
If you intend to get rid of your home, you should look into the following options with your mortgage lender:
Sale: You may decide to sell your house. Your lender will usually give you a set amount of time to sell your home and may require that you work with a real estate professional.
Short sale: If you cannot sell your home for your entire loan amount, your lender may accept whatever amount you can obtain for your home, even if that amount is less than the amount of the mortgage loan. You may owe some income taxes on the amount difference; however, The Mortgage Debt Relief Act of 2007 may protect you from being taxed for money you will never see.
Assumption: Another buyer may be able to take over your mortgage loan, per approval by your lender.
Deed in lieu of foreclosure: The lender may take back your property and forgive the remaining balance of your loan. This option is sometimes preferable because it causes less damage to your credit rating.
4. Protect your credit score.
No matter what decision you make about your mortgage loan, do your best to protect your credit rating. If you decide to keep your loan under its new terms, be sure to make timely payments on your mortgage. Eliminate unnecessary expenditures, such as going out to eat or having cable TV. If you decide to sell your home, keep to the terms of the sale and work with your lender to make sure that your credit score is affected as little as possible during this process.
