What Happens When You Can’t Pay Your Mortgage?

Times can get tough. No doubt about it. Maybe a job loss slashes your income. Maybe a must-pay medical expense crops up. Maybe an investment tanks.

The problem can come from any direction, often when you least expect it. And suddenly, the money you meant to use for the monthly payments on your home loan just isn’t there.

So, what should you do if you start having a hard time paying your mortgage?

Don’t panic, for openers. Help is available. Be pro-active and investigate your available options with your mortgage lender and a HUD-approved housing counselor. We’ll detail those options a little later, including a number of supportive arrangements offered by the mortgage company that holds your loan and was expecting your payment.

Even if you’re so far behind on your mortgage that you despair of ever getting current, you can get assistance and perhaps avoid foreclosure (losing your home to the mortgage company when you can’t make the payments) if you reach out to the right people.

It’s worth remembering that nobody wants a foreclosure, including the mortgage company. Foreclosure isn’t profitable for the company that loaned you the money for your home. It costs the lender money in attorney fees, repairs to the property, marketing the house for re-sale and other expenses.

“Mortgage lenders don’t want to become landlords,” says Ellison Brimage, a senior loan officer for SWBC Mortgage Company in Greenwood Village, CO. “The last thing they want to do is take the house back after they’ve made you a loan. They would much rather the payments come to them and they can continue that 30-year relationship that’s been established and built since the beginning of the loan.”

The threat of foreclosure aside, there is another reason it’s important to act quickly when you are unable to pay your mortgage. The sooner you have a new plan in place, the less your credit score will fall. Missing even one payment on your home loan will almost immediately lower your credit score, perhaps by as much as 50 points. If you miss three payments, your credit score could plummet by 200 points.

The drop can be more drastic even than not paying rent. Why? Because a landlord, especially a landlord who only manages a handful of properties, might not bother to report an overdue payment to the credit bureaus. A mortgage lender definitely will report non-payments.

Get the help available to you.

Falling Behind on Payments: What to Expect

It won’t take long for the bank or credit union to notice that you’ve missed a payment and set the wheels in motion to safeguard its investment. The clock will start running almost before you know it, which is yet another reason to reach out to your mortgage lender or a nonprofit credit counseling agency as soon as you realize you’re going to fall behind.

Here’s a timeline of what to expect.

• Most mortgage lenders will give a homeowner a grace period if the payment is late. For example, if it’s due on the first of the month, you should have until the 15^th to make it before any penalties kick in. If the homeowner is in touch with the lender and honest about his or her financial hardship, the grace period sometimes can be extended to 30 days.
• When the grace period ends and the payment hasn’t been made, the lender will assess a late fee. It’s usually calculated as a percentage of the monthly payment – somewhere between 3% and 6%. If the amount due is $800 and the late fee is assessed at 5%, an extra $40 is added.
• If 30 days pass and the payment still hasn’t been made, the loan goes into default. That’s when the mortgage lender gets serious. The lender will notify the credit bureaus that the payment has been missed and the impact on the homeowner’s credit score takes effect.
• In most cases, the bank won’t file a formal notice of default and send a letter demanding payment until 90 days after the missed due date. But when it does, the courts officially are notified and, depending on the state, a notice of sale (read: foreclosure) can be sent to the homeowner.

Three months. It happens fast. But throughout that process, you’ll have time to work with the lender and a HUD-approved credit counselor to put a plan together that can help you catch up on your payments and protect your mortgage.

Talk to Your Mortgage Lender

Make the call, and make it soon. Talking to the people who lent you the money to buy your house is the most important step you can take when you can’t afford to pay your mortgage. They won’t bite. Instead, they’ll help you explore your options.

“I got to tell you: It takes a lot for a mortgage company to not want to work with a borrower,” says Brimage. “You basically have to sleep with the CEO’s sister for that to happen. For the most part, they will work with you – within reason, right? The lender will listen and have some empathy and compassion.”

Before you call the lender, though, get prepared for the conversation. Do the homework. Have the right information handy when you start talking about possible solutions.

You’ll need to have answers ready to a handful of questions, including:

• Why are you having trouble making the mortgage payments? Honesty is the best policy here. Don’t make excuses like the dog ate the checkbook or the bill got put in the recycling again or the Martians took the money with them the last time they left. Take responsibility. Explain exactly what the problem is. You don’t have to be ashamed about losing a job or spending money for a medical issue. Tell the lender you’re trying to do what it takes to make things right.
• How temporary (or permanent) is this situation? Look ahead. If this is a short-term problem – if you expect to have the money when next month’s payment is due — let the lender know. If it’s more serious than that, don’t hold back. That information will steer the conversation toward the best options available to you.
• What is the status of your income, expenses and other assets? Put together a budget, even if it’s a simple, basic one. If you can’t afford the current mortgage payments, the answer to these questions will help determine what amount of monthly payment will work for you and your eligibility for various relief options. The lender will use that budget to develop a new plan.

At the end of those conversations, your mortgage company might ask you to reach out to a HUD-approved housing counseling agency to explore other resources. Try not to be defensive. Keep in mind that the lender wants to keep the loan active, just like you do. Even if it’s in a different form.

“I don’t know how many people don’t make payments and just sort of go dark,” says Jeffrey Aronheim, a loan originator and sales manager for CrossCountry Mortgage. “It’s always better to reach out and see what’s available, because lenders don’t want to have to foreclose. They’re not in the business of owning assets like houses. That’s not what they’re there for.”

One more thing: Be persistent. If you are speaking with a mortgage company representative at a call center and aren’t satisfied with the information and support you’re getting, try again later. You might find a different representative to be more empathetic and helpful.

What Are My Options?

You don’t want to lose your home. You don’t want to face foreclosure. So, what can you do when you begin to miss payments? You and your lender might explore one of these ways to address your situation. You and your lender might explore one of these options for stopping a foreclosure.

• Home refinancing. Generally, this is a way to extend the length of your loan and lower your monthly payments. It’s a good option for homeowners whose cash flow problem isn’t already so dire that they can’t make any payments.
• Loan modification. This alternative can take some time to put into place, but it can help a homeowner in serious financial trouble. A loan modification changes the mortgage loan (its rate, its length, its monthly payment) on either a permanent or temporary basis.
• Forbearance. In some circumstances, a lender will agree to provide some temporary relief by arranging for lower monthly payments or delaying payments altogether. Eventually, you will have to make up what you owe under the original terms of your mortgage, but forbearance provides a respite during hard times. If you are facing money trouble related to the pandemic, the federal government’s CARE Act provides COVID hardship forbearance for homeowners who have a federally-backed mortgage (HUD, FHA, USDA or VA), and, when the term of the loan ends, it doesn’t require a lump-sum payment of the amount you haven’t been paying. That program, though, may come to an end when the pandemic subsides.
• Short sales. This is a way that might keep your credit score from suffering as much damage as foreclosure would cause. It works when, with a lender’s agreement, a homeowner sells the house for less than the remaining balance on the mortgage. The lender gets the proceeds of the sale. As an alternative to foreclosure, the credit hit won’t be as harsh for people who aren’t hopelessly behind on their mortgage payments.
• Declaring bankruptcy. Bankruptcy, especially Chapter 13 bankruptcy, can be a way to keep your house and start to repair your finances. Filing a Chapter 13 bankruptcy immediately keeps the mortgage holder from foreclosing on your home. It will hurt your credit score, but a Chapter 13 repayment plan can be an affordable way to get back on your feet.
• Renting Out a Portion of Your Home. You know your home and your community better than anyone. If you have a “mother-in-law suite,” or a guest bedroom, or a bedroom left vacant while a child is off to college, you may have a source of income that can help cover the mortgage payment. A realtor can help connect you with a lodger or tenant. A community Facebook or other social media page might be a good bet. So is the housing office at a nearby college or university (consider the billboards on campus, especially near the beginning of a semester). Rent will depend on the size and quality of your space, as well as the local rental market.
• Surrendering the home. Also called a deed in lieu of foreclosure, it’s perhaps the last option for a homeowner before foreclosure. You will lose your home, but it will relieve you of the liability for your mortgage. You voluntarily sign over the deed to your lender, who then re-sells the house. One advantage to this option is that surrendering the home should allow you to rebuild your credit score sooner than foreclosure will.

If the amount you still owe on your mortgage is far more than the equity you have in your home, foreclosure is even less attractive to the lender than usual, as it will be more difficult to make any money when it sells the house. For that reason, you might be able to extend the conversations with your lender about renegotiating and fend off foreclosure for some time while you aren’t making your payments. Essentially, you are challenging the lender to do something it doesn’t want to do. It isn’t, perhaps, ethical and it probably only delays the inevitable, but it might be a legal way to stop paying your mortgage, at least for a time.

Government Programs to Help Pay Your Mortgage

The federal government also provides resources for people who are unable to pay their mortgage, though a number of its programs designed for mortgage relief during the pandemic ended after the COVID-19 National Emergency was declared over in 2023.

In some cases, the type of mortgage loan you have will determine your eligibility for these programs. For example, federally-backed mortgages (HUD, FHA, USDA or VA) offer slightly different COVID hardship forbearance benefits and eligibility requirements than conventional loans backed by Fannie Mae and Freddie Mac. It’s worth mentioning that forbearance in general will be available even after the COVID-specific programs expired. Check with your housing counselor or lender about an updated status.

Other government programs that can help:

• Streamline Refinance. If you have an FHA, VA or USDA mortgage, you might qualify for this program designed to make it easier and faster for borrowers to refinance with a rate reduction. It involves very little paperwork; borrowers don’t even have to verify their income.
• Flex Modification. This program is offered by the Federal Housing Finance Agency (FHFA) and works for those with Fannie Mae or Freddie Mac-owned loans. It can include a 20% reduction in principal and interest costs, and it allows the term of a loan to be extended to up to 40 years.
• Homeowner Assistance Fund. In March 2021, the Biden Administration initiated this program as part of the American Rescue Plan Act to provide $10 billion to states to deliver help with mortgage payments and other housing-related expenses. It expands on the Hardest Hit Fund Programs (HHF) established in 2010 to send government aid to states that at the time were suffering the most from unemployment and the economic and housing market crises. (Many states have since closed their HHF programs, though some are still open.)
• The Making Home Affordable Program (MHA). The Treasury Department introduced the MHA in 2009 to help homeowners fend off foreclosure. It featured two centerpiece programs: the Home Affordable Modification Program (HAMP), which provided borrowers better terms on their existing loans; and the Home Affordable Refinance Program (HARP), which made it easier for homeowners who might not be eligible for conventional refinance loans to lower their mortgage rates or reduce the length of their loans. While the Making Home Affordable program has expired, it still maintains a website and a hotline (888-995-HOPE) that direct those in need to nonprofit credit counseling agencies.

Transitioning to Alternative Housing Options

Sometimes financial problems arrive suddenly, creating a crisis that calls for a rapid response. It is a smart idea to have some ideas ready for action, just as you would have a fire drill or plan what to do in the event of flooding, power loss or other unforeseeable calamities. Before housing becomes a crisis, be prepared.

• Consider renting. Apartments can easily cost as much or more than your mortgage payment, but there are more affordable options. Check with a local realtor. Use Facebook. Its Marketplace feature offers more than used cars and vintage guitars. Someone in your neighborhood could be renting part or all of a property.
• If you are facing imminent foreclosure or loss of your current home, consider downsizing to a smaller property or a more affordable neighborhood. Many people find themselves underwater with a mortgage. Reducing your monthly obligation is one alternative.
• Family and friends can be a good option for shorter-term situations. Be sure to have an agreement on helping with finances and limiting the duration of your stay. Good communication prevents a lot of possible discord. If it becomes a long-term problem, be upfront about that and plan accordingly.
• Check your local city or state websites for affordable housing options. You are not the first person to run into a temporary housing problem. Resources exist to help people. A Google search can help get you started.
• Set aside money for an emergency fund. This is a good idea before you run into a crisis, but there is no better time than the present. Being disciplined now can prevent you from falling behind on rent or mortgage payments in the future.

Building an Emergency Fund to Prevent Future Payment Issues

• There are two pieces to the puzzle presented by an emergency fund: having the discipline to save and having funds to save in the first place. Look at your monthly cash flow and see how you can improve the income/outgo balance. Cutting expenses such as your cable bill or your dining out habits can be painful, but can give you money for more pressing expenses. Moving money to your savings account, where it isn’t tied to your ATM card, can be done automatically through your bank or its app. Be sure to monitor transactions so you don’t leave your checking account short.
• Many of these strategies help you get through a crisis or challenging situation. They can also help you avoid such challenges in the future. Watching expenses and cutting where practical is always smart to do. Having an emergency fund shouldn’t wait for an emergency. A little planning and discipline can be a pain in the neck, but you’ll thank yourself the next time trouble arrives.

Avoiding Scams

When you’ve been missing mortgage payments and are in fear of losing your home to foreclosure, you’re vulnerable. Foreclosure scammers are more than ready to take advantage of that vulnerability by making unsolicited offers of an easy way out for you.

Beware: You can be left without your house, and still be obligated to pay your mortgage.

“If someone is real slick, they just kind of walk into your home and say, ‘Hey, go ahead and title it over to me and I’ll help you out and take care of it from there. Here, sign these forms,’” says CrossCountry Mortgage’s Aronheim. “It’s a very easy thing to do. It’s like a two-or-three-page document. You could fill it out in two minutes. And what you’ve done effectively is given up ownership, but you’re still on the hook for the mortgage.”

That’s why it’s important to always work with a HUD-approved housing counselor who, by the way, doesn’t cost the homeowner a red cent. Neither your mortgage lender nor your housing counselor will charge you for the help they provide with a relief plan.

Aronheim advises against signing any paperwork before a lawyer reviews it, so you understand exactly what you’re doing.

Some of the red flags to watch out for from a foreclosure scammer:

• The person promising his or her help asks to be paid up front.
• You get a guarantee that you won’t lose your home.
• You get a guarantee that the person promising help will get the terms of your mortgage improved.
• You are told you can stop making your mortgage payments altogether.
• You are told to send future mortgage payments to someone other than your mortgage servicer.
• You are asked to sign over the title to your home.
• The person with whom you are dealing offers to conduct a forensic audit.
• The seal of the government-affiliated company the person claims to represent doesn’t look like a government logo.

“If someone is calling you and saying, ‘Hey, I can help; just sign your deed over,’ it might sound too good to be true,” says Brimage. “Well, it probably is too good to be true.

Meet with a Foreclosure Counselor

Remember that assistance in the effort to avoid foreclosure is confidential and free of charge from a HUD-approved counseling agency. It’s a phone call you can and should make at any point in the process in conjunction with your conversations with your mortgage lender about relief options.

A HUD-approved housing counseling agency representative will discuss with you what options are available and what might work best in your specific situation. It’s well worth the effort to learn more about housing counseling.

Understanding the Legal Implications of Foreclosure

A mortgage is a contract, a legal document that explains the conditions under which you get to occupy a home while paying an agreed amount to a lender. The home belongs to the bank or mortgage company until the conclusion of that contract. These basic facts are at the foundation of the foreclosure process. If you don’t keep up your end of the deal, a process begins that can end in eviction from your home. Fortunately, there are many steps before that point is reached. Six of them, to be precise.

• Payment Default. This doesn’t mean you are late on a mortgage payment. Typically, lenders allow a grace period – 15 days is customary – to make a payment without incurring a late fee. You are not generally considered in default until it is clear you are unable to keep up with the terms of your mortgage. Before that occurs, you should take the step of contacting your lender to notify them of any problems that are affecting your ability to pay.
• Notice of default. The lender sends this document to a court 30 days after a payment is missed. The borrower is also notified and given a list of options to proceed. It is a procedural move that doesn’t mean you are evicted from your home. It does signify that you have entered a new phase. Catching up on your payments is still possible, although there may be late fees added. After a third missed payment, the lender can notify you that you have 30 days to get your payments up to date.
• Notice of Trustee’s Sale. This document can follow a fourth missed payment. You will be notified by your lender’s attorneys and given guidelines to prepare for options and next steps. Laws regarding these procedures vary from state to state. Some states, for example, require a judge to oversee a foreclosure, a process that takes longer than a non-judicial process in another state. States set their own timelines for each step of the process.
• Trustee’s Sale. The length of time between the notice and the trustee’s sale varies by state. It can be as quick as two or three months, typically if a judge is not involved. The homeowner can manage a sale under these terms. A judicial sale can take longer, and the sale will be managed by the local sheriff’s office or the court. The home will become property of the highest bidder.
• Real Estate Owned. If no bid is high enough to cover the lender’s value of the home, the lender can take over the property. It will then be sold by a realtor as an REO property.
• Eviction. At this point, the foreclosure process is complete. Depending on state law, the occupants must move out of the house within a few days or up to several months. There is often a redemption period during which you can resolve your debts and get back into the house, but that is limited by state laws.
• Legal assistance. At any point in the process, you can and should consider consulting with an attorney. That option can provide knowledge of your rights under the law and of options you may not know about. At the point of receiving notice of a trustee’s sale, you will be dealing with attorneys for your lender. Offer insights into state-specific foreclosure laws and how they might vary.