If you are worried about being able to make your mortgage payments, you may be looking for strategies and ideas for how to avoid foreclosure. Ideally, you will be able to recognize problems with your mortgage early, before they get out of hand. Some mortgage issues can be resolved very easily, with only minor tweaks to your budget or a brief period of following alternative arrangements with your lender. Other times, the challenges can be more difficult, and avoiding foreclosure may require more drastic steps. This article gives a basic overview of common options you might consider.
Reallocating Money in Your Budget
Another somewhat obvious solution (but again one you should not overlook) is to adjust your budget and reallocate funds toward your mortgage payment. This may not help you much if you have missed multiple payments or foreclosure proceedings have already begun. But if you are just beginning to struggle with your mortgage, then this may help tremendously. The task will essentially boil down to eliminating all “fluff” from your budget—essentially reducing spending on “wants” to as close to zero as possible. Meanwhile, you can look for options for increasing your income. One such option would be renting out part of your home, what some call “house hacking,” if you have the space to do so. If you are successful with this approach, it should free up more money to put toward your housing payment and make it more manageable for the long-term.
Working with Your Lender: Forbearance
Working with your lender can be a critical step in saving your home. Open and frequent communication often solves far more problems than it creates when it comes to your mortgage. If you know you can’t make an upcoming payment or have missed a payment, contact your lender or servicer immediately. Working directly with them may be a great way to come up with a solution that is affordable and catered to your needs.
One option is mortgage forbearance. This arrangement is typically used when you face a short-term hardship. Under such a plan, you would be granted a period of time in which you do not have to make payments, though they will be due later. These delayed payments are often due at the end of the forbearance period, as a lump sum. The advantage of the approach is that it gives you time to catch up and save for a large lump sum payment. However, lenders may also allow you to enter a repayment plan to pay back the delayed payments over time, or in some cases you may be able to add them to the end of the mortgage. One piece of bad news is that, unless your lender agrees otherwise, forbearance is reported to credit bureaus as a negative mark. Of course, this is still a better alternative to losing your home and suffering a worse negative mark from continued missed payments or foreclosure.
Note: the forbearance option granted by the CARES Act in response to COVID-19 operates by its own legislatively-created set of rules. For example, forbearance under the CARES Act does not trigger negative credit reporting.
There are other arrangements you might reach with your lender directly too—modification and refinancing are two such options. Modification is a fairly drastic step, typically used when it is clear that the borrower cannot make the monthly payment for the long-term (as opposed to a short-term hardship for forbearance). Modification involves an overhaul of the mortgage’s terms. Refinancing, on the other hand, is typically a less drastic option used by borrowers with good to excellent credit, often to get a lower interest rate or a longer loan term. This can provide significantly lower monthly payments, depending on your situation.
Moving and Selling Your Home
This may be the most obvious option, and it is certainly not applicable in every situation. But, don’t overlook the possibility of moving. Foreclosure typically comes with two major negative aspects: losing your home (the emotional and logistical impact) and damage to your credit report and score (the financial impact). Moving might help you avoid the financial impact.
Sometimes foreclosure happens because emotion plays a strong role. Maybe you are trying to preserve a family home or a home that you are head over heels for. Maybe you moved recently and did not expect that money would feel so tight each month already. Whatever the case, if the mortgage payments are becoming unaffordable, moving may solve the problem. Downsizing to a smaller home or apartment, or just a different community where home prices are lower, could equate to huge savings in some cases. Consider how much equity you have in the home (the difference between how much the home is worth and how much you have remaining on your mortgage). If you have some equity and the housing market is strong (meaning you could sell for a good price, preferably more than you paid to buy it), then this might make financial sense. That does not mean it is an easy decision, but it may be the right one.
Working with a Counselor
To help determine which path forward is right for you, it may make sense to work with a housing counselor. A housing counselor is an expert in all of the foreclosure prevention options available—including the strategies that you would technically implement yourself and those that require lender approval. In fact, housing counselors are also mediators between homeowners and lenders, and many people who have used a housing counselor have reported that it helped them feel “heard” by their lender and less like their lender was avoiding them. Studies have shown that housing counselors have a major positive impact.
There are, unfortunately, many people and companies who take advantage of homeowners. The CFPB recommends that you only work with HUD-approved agencies. Also, remember that no company should charge you up front, and if a company guarantees that they can save your home, that is a red flag and you should walk away.
To contact a housing counselor at one of the NFCC-member, HUD-approved agencies, start here.