Behind On Mortgage Payments? Need Help? Here are some options.

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Falling Behind On Mortgage Payments

Sometimes, life gets messy.

You bought your home with the intention of making every payment on time for 30 years.

But sometimes your situation changes, there is an unexpected personal or national financial crisis, job loss, illness or other hardship.

If you are behind on your mortgage payments, you do have options. It is nothing to be ashamed of, because there are many who go through the same stress.

It does not mean you failed, it just means it is time to adjust your strategy, learn what you can from your situation and take steps to either catch back up or sell your house and move on.

This guide will give you 6 options and more details about what to do next.

Communication with professionals is key, and the sooner the better. If you are 2 months behind on mortgage payments, you will likely have more options than if you are nearing 4 months behind on mortgage payments.

So address the issue as soon as you know you will not be able to pay for the foreseeable future.

Usually, your loan servicer is not a terrible company that wants to take your house from you. They want you to continue to pay the mortgage or get the money that they are owed.

Here are 6 options for you if you need help and are behind on your mortgage payments.

1. Talk To Your Current Lender

This first option may be uncomfortable, but it can also be helpful and could be critical in getting you back on track.

“Lender” is what most people think of when they pay the mortgage. But the more accurate term is the “loan servicer”.

Whoever you are making payments to likely purchased your loan at some point after you bought. This is who you want to reach out to. Their number should be on your most recent bill.

Sometimes, you can ask your your current lender for forbearance, or find that they have a better option for you.

Forbearance

“Forbearance” is a term that makes the news during especially difficult times in the country. During the 2020 Coronavirus outbreak, many lost people lost their income and had to take advantage of mortgage forbearance.

Mortgage forbearance is a temporary pausing of payments or temporary restructuring of payments lower than they currently are.

You will still have to make up the payments. Your loan servicer can tell you the terms and whether they will allow you mortgage forbearance.

Make sure that the terms are logical for you. For example, one scenario could be no payments for 3 months, but then on the 4th month you will owe all 4 months. This could work if you know you have a lump sum of cash coming to you in the near future, but for many this is not the case.

Another mortgage forbearance structure could be no payments for 3 months, and you will extend your payments to the end of the loan. So you will owe 3 additional payments later on. This is, most often, a much better scenario.

Every lender/loan servicer is different with their policies so make sure you talk it out with them.

Most lenders will want regular updates on your economic status, and grant forbearance only during a time of hardship such as a job loss.

Loan Modification

A loan modification is another option that you can discuss with your current lender or loan servicer. This is a long term option for attempting to get a lower payment.

There are several ways that a lender can reduce your monthly liability in your loan.

Your loan term can get extended, for example from a 15 year to a 30 year. Or if you have an adjustable rate mortgage, they could work with you to move to a fixed rate at a lower rate.

These are just two examples. There are many different ways that a lender could restructure a loan to help you with a lower monthly payment. Again, you likely will have to show hardship in order to qualify.

Historically, there are occasionally loan modification programs offered by the government. For example, after the 2008 financial crisis many had trouble and fell behind on mortgage payments.

Programs were offered as an alternative to foreclosures or short sales.

Removing Mortgage Insurance

If you have mortgage insurance, some loan types will give you the chance to remove it once you reach a certain amount of equity. Ask your lender about this.

2. Talk To a New Lender

Often, your current lender will simply not work with you, or their terms will not be helpful for your situation. This is the time to seek out your other options.

One alternative is to see if another lender can help you. Tell them what you are looking to do, and they can present you with some options. Here are a few examples.

Three different colored houses with a different price tag on each. Blue background.
Sometimes, shopping around for a better deal on your mortgage loan can help get you out of your situation.

Refinancing To Lower Payments

If you still have income coming in, but the mortgage is just overwhelming you or your income has changed to a lower amount, you can look into refinancing into a better loan.

Another loan could get your payment lower. Depending on the interest rate, mortgage insurance and other factors.

If you can get yourself into a payment you can afford, this is a good option.

If your current loan does not allow you to remove mortgage insurance, perhaps a new lender can structure a loan without mortgage insurance or other alternative ways to handle mortgage insurance.

Cash Out Refinance

If you have equity in your home you could refinance and also get some cash out in exchange for a larger loan.

This would only make sense in specific situations where you need extra cash short term to pay the mortgage. If your income has gone temporarily down, but you expect it to recover this could be something to consider.

This will most likely cause your payment to go up, not down because your principal loan amount will increase. But you will have more cash to get you through a hard time.

Home Equity Line Of Credit (HELOC)

Again, if you still have income but are in a cash crunch for one reason or another, this could be an option too.

Instead of a whole new mortgage, this is another lien on your home that will be paid back separately from your mortgage.

Similar to a refinance, you will have trouble getting this loan done if you have lost your income completely. Lenders use your income in a ratio to figure out how much they can loan you.

3. Lower Other Expenses

If you have talked to both your current lender and new lender and have not found any help, it may be time to get creative.

Sit down with your budget and see what else can be cut so you can afford the mortgage.

In Fairfax County, there is a real estate tax relief for certain criteria and income levels. Call your home insurance company as well to see if they can lower your payments with different coverage.

If you can figure out a way to cut costs and get current when behind on mortgage payments, it could save you from leaving your home and also negatively impacting your credit any further.

4. Sell Your House

If you cannot afford your mortgage payments, it may be time to face an uncomfortable fact: perhaps it is the house that you cannot afford.

Maybe your financial circumstances have changed since you bought the property, you just got a little too ambitious when buying or maybe you bought with someone who is no longer helping you pay.

Either way, one way to deal with the situation is to sell the house. Now, if you are behind on your payments, you will want to sell in a timely manner before the foreclosure process begins.

Most foreclosures in Virginia begin after you are 4 months behind on the mortgage.

So you should sell as soon as your realize that you want out, especially since your credit will suffer the more payments you miss.

One thing to consider: you will need to have equity in your house. If your property is worth $600,000, and you owe $500,000 on your loan, you have approximately $100,000 in equity, minus closing costs.

If you do not have equity, see the next step about short sales.

Sometimes selling to get into a more affordable situation, whether buying a more affordable property or renting for awhile, is the best solution.

5. Attempt a Short Sale (Sell Your House When You Have Negative Equity)

A vector artwork of a family on top of a house that is partially underwater, with a life preserver being thrown to them.
Owing more than the house is worth is commonly referred to as being underwater. A short sale can help you get out of the situation.

Selling your house is a clean option to get a new start, if you have equity.

Not everyone is that lucky. If you do not have equity in the property, you are in a situation where your property is “underwater”.

Let’s say your home is worth $325,000 and the mortgage balance is $400,000. Your equity is approximately -$75,000 (yes, that is a negative, meaning you would owe the bank). At this point you have a few options.

The first is to sell the house and then come up with the $75,000 to pay the bank for the remainder. However, if you are behind on your mortgage payments it is a safe guess to say you do not have that money.

The second option is to do what is known as a short sale. A short sale is when you sell your house for less than what you owe, and the lender forgives the difference.

You will not make any money on a short sale, unless there is some special program in place (there has been in the past, such as the HAFA program after the financial crisis). But most sellers in a short sale move on without any cash.

The Process

The short sale process will start with finding a real estate agent who has experience with this kind of transaction. If you are considering a short sale in Northern VA you can reach out to me with questions.

Generally, a good agent will also work with a third party short sale negotiator. Their job is to be the contact between you and the bank, to try to get your sale approved by the bank so you can close on the house.

As soon as you decide to do a short sale, you will also be getting the home on the market. You and your new home buyer will settle on a contract price.

The next step is to get a packet to the negotiator with your financial information so they can prepare to present it to the bank. Your agent should provide you with this.

Once a buyer makes an acceptable offer and the contract is signed by both parties, the negotiations switch to the lender and your short sale negotiator.

This process can be very lengthy, sometimes 3-6 months depending on the type of loan, how many loans and how responsive the lender is.

Once the lender reviews the contract (which again, can take months), they will approve the contract, counter the contract or reject outright.

A lot of the time, the first contract will get a counter, but occasionally you get outright approval. You can then go back to your buyer with this number to try to get a deal.

If they do not accept it, you can also go back to the market with an “approved price” and list it at the the price that the bank countered with. This can save time since you know that the bank will very likely accept that price.

Upon a successful short sale, you will walk away without owing any money. The amount forgiven also may not be subject to taxes, depending on current tax laws so talk with an accountant pro about that.

Why a Short Sale?

Many who are behind on mortgage payments choose to go this route. Why go through the trouble of a short sale?

Sometimes the process can give you some more time to figure out your next living situation, as it can stop the foreclosure process while negotiations take place.

It also is generally agreed upon that while a short sale will damage your credit and leave a mark on your credit history, it is not quite as bad as getting hit with a foreclosure.

Experian’s Rob Griffin is their Director of Public Education and has stated that a short sale is slightly better than a foreclosure, which is slightly better than bankruptcy.

It might also be possible to get a loan more quickly after a short sale than a foreclosure or bankruptcy. But that depends on many factors with your credit and financial health.

6. Foreclosure

Foreclosure is the process of your lender/bank/servicer taking back your house since you are not paying them anymore. You signed a Deed Of Trust when you bought your home which gives them that right.

Virginia is a non-judicial foreclosure state, which means the lender does not have to go to court to go through the process.

Typically, you will be a served a notice after you are 4 months behind on your payments.

This is called a “notice of default” followed by a “notice of sale” that states that the lender will be selling your home at the courthouse steps to satisfy what you owe.

Man in black suit takes a home away in a shopping cart. Meant to symbolize foreclosure. This is a vector image.
Letting the bank take your home in foreclosure is an option, however it is not usually your best option.

If you have equity, you will want to sell before going through a foreclosure. If your home does go to auction, you will get any amount above what you owe.

But selling at auction will not be able to net you what you can get selling the traditional method.

What about a short sale? Is a foreclosure better or a short sale? As stated above, in most cases, a short sale will be better on your credit and also can be viewed more positively on your credit history than a foreclosure.

Short sales take more effort, but they may buy you some more time to decide where you want to live next. And could have less of an impact on future credit.

Credit Impact

When you are behind on mortgage payments, most likely your credit will be negatively affected. Missed payments show up on a credit report and will also lower your score.

So the sooner you can get back on track or move on from your house, the better it will be for you long term and short term.

A short sale, foreclosure or bankruptcy will be even worse for your credit than missing payments.

Remember, the experts consensus is that all are bad for credit , but a short sale is the “least bad” in most cases. Followed next by foreclosure and then bankruptcy being the worst.

Credit can be repaired, so if you have fallen on hard times the future does not have to be bleak and financial problems do not have to follow you forever if you take steps to change them. Here is some information from the FTC on repairing credit.

What Is My Home Worth?

One of the first steps you should take if you are behind on your mortgage payments is to figure out what your home could sell for.

This can help you figure out what options are open to you and which options are not available.

If you live in Northern VA, I can help you with this. I can also give you an estimate of what your closing costs will be so that you know how much equity you have or if you will be facing a short sale.

Need Help?

Your lender does not want you to lose your house. They would much rather have money (or have you caught up and making payments). So they are likely to work with you on one of the steps above to avoid foreclosure.

Do you need help sorting out your options? fill out the form below and tell me more about your situation.

Will Rodgers

Will is an award winning real estate agent, author and high tech marketing expert. Adopting a consultative approach he has helped hundreds of clients meet their real estate goals in the Northern VA real estate market.

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