If your finances reach the stage where you can’t afford to pay your monthly mortgage bill it will be an anxious time in which you need to give careful consideration to your options. Personal circumstances will vary and you should assess if this predicament is going to be a temporary set back or an on going problem. Other factors need to be determined such as other levels of debt, and the level of equity built up in the home.
Where the borrower has equity in the home there is the chance of refinancing the home loan to more affordable terms. Refinancing may offer a reduced interest rate and the opportunity to extend the term of the loan to ensure lower payments. It can be a costly option but the costs involved can be added to the total mortgage loan. In the long term following this course of refinancing over a longer term will cost you more in interest payments but it solves the immediate problem and allows you to retain your home.
The other option for those with equity is to sell the home to release themselves from the mortgage. This is a wise course as such a move will repay the mortgage debt in full; provide an equity balance which can be used as a future down payment; and not impact ones credit score. It may make more sense to rent until the financial position improves.
If however the situation appears to be temporary and you have equity your lender may agree to a period of forbearance, where the monthly payments are suspended for a set period. You then resume the payments plus make up the missed payments with a repayment plan. This saves the costs of refinancing and buys you time until your financial circumstances improve.
Those with no equity to negotiate with but who judge that their financial problems are temporary should approach their lender regarding a loan modification. It is possible the lender may be agreeable to reducing the interest rate, reducing the payments, or deferring the payments. After an agreed period the payments which were paid at a reduced rate, or suspended, will need to be repaid along with the usual payments.
The worst case scenario is a weight of debt alongside the mortgage payments, whilst having little or negative equity. This represents a long term problem with few options. It is wise to speak to your lender as soon as possible to discuss your options as a temporary solution through loan modification may not help beyond a short period.
If it appears that you are heading towards foreclosure then in these circumstances you should request that the lender allows the consideration of a short sale which is preferential to a bank foreclosure. You sell the property at less than market value but don’t receive a foreclosure notice on your credit report.
If you do take this option it is important to ensure that the lender agrees to sign off the promissory note as satisfied so that there is no possibility of a mortgage deficiency judgment being served when you begin to recover financially.
If you do anticipate future problems with your mortgage payments or are already experiencing them, then it pays to act sooner rather than later, and approach your lender regarding your situation. Remember that foreclosure can be costly to the lenders as they have the legal costs of foreclosure to bear, and if they fail to sell the property they have the additional expenses of insuring it and paying property taxes.
Thus an approach to the lender with an honest assessment of your situation is more likely to reap co-operation than just ignoring the problem and hoping it will go away.