What To Do If You Can’t Pay Your Mortgage

May 2, 2011

Owning a home is a great thing… until you find yourself in a financial place where you can’t pay the mortgage loan. With the housing bubble going bust and the ensuing financial crisis the inability to pay a mortgage has gone from being a rare occurrence to, sadly, something quite common. Millions of Americans have found themselves without incomes, without money to pay for groceries and utilities, not to mention a monthly mortgage payment.

Steps to Take If You Can’t Pay

It is of little comfort to know that if you are in this situation that you are not alone. Although it feels overwhelming, try to remain focused. Here are some things to do if you can’t pay your mortgage:

Notify the Loan Servicer

Honesty is the best policy. Being honest with yourself during tough times is hard, not to mention to a financial institution you owe thousands of dollars to.  Let your lender know you intend on paying what you owe but have hit a rough spot.  See if they’re willing to work with you  Perhaps in a few months you’ll be back on your feet and able to pay again.  It’s better to be in contact with the bank than to stop making payments and ignore them.

Apply for a Home Modification

The federal government funded a large home mortgage modification program called Making Home Affordable. You need to apply for a HAMP modification (HAMP stands for Home Affordable Modification Program). There are specific requirements you must meet to be eligible for a modification. If you don’t meet the qualifications don’t cling to hope that you will still be able to modify your mortgage. The government program isn’t going to change to suit you.

Ask for Forbearance

A forbearance is a period of time the bank allows you to, essentially, get your life together in order to get back on track paying the mortgage note. With a forbearance the loan servicer may reduce or completely eliminate your payment for a specific period of time. If you’ve lost your job but anticipate getting back to work soon this can be beneficial. You can save on costs today, get your income back, and continue to make payments to the bank. You’ll owe either higher payments or a lump sum at some point to make up for the payments and interest you avoided during the forbearance.

Sell Your Home at a Loss

If you can’t get a modification or a forbearance it is time to consider selling your home, even at a loss. Many banks are covered up in foreclosure proceedings and you might be able to get away with living in your home “rent” free for a while. But eventually the bank will catch up with you.

Find an Experienced Agent

Obviously it’s best if you can avoid getting to this point. Try and find an agent who’s dealt with other homeowners in your same situation.  They should have a general feel for a realistic selling price and help you price the home for a quick sale.  Since so many people have been hit by the economic downturn, there are many realtors that have worked to sell homes that are facing foreclosure.  The benefit of working with one of these agents is that they know the system and what your options are.

One thing to watch out for is that people in your situation may feel desperate to sell and crooked agents may try and exploit your situation.  So be sure to screen the agent well and check their references.

Short Sales

One option to consider is doing a short sale – but you will need the bank’s approval. A short sale is where you sell the home for less than what is owed on the mortgage. The bank has to agree to this and approve any offer that you accept – which can slow the process down.  Going through a short sale is preferred over foreclosure but be aware that it still does damage your credit and will make getting a loan in the near future more difficult.

If you’ve been in this situation before, are there any other tips that you’d add?


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Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, ING Direct, and many others.

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