Finance

What Happens if You Can’t Pay Your Mortgage?

May 9, 2022

Your circumstances can change quickly—whether you experienced a medical emergency, a loss of income, or familial hardship. And sometimes, outside circumstances make it more difficult to pay your mortgage.

If you’re worried about missing a mortgage payment or are already getting behind on mortgage payments, there are several options available to you. In this guide, we’ll walk you through what happens if you can’t pay your mortgage and explore solutions to avoid foreclosure.

What Happens If You Don’t Pay Your Monthly Mortgage Payment?

Your mortgage debt is a legal agreement that states that you’ll repay both the original cost of your home and the resulting interest with scheduled loan payments. This loan relies on your property as collateral—if you don’t fulfill the terms of the mortgage loan, the lender has the right to take over ownership of your property.

If you don’t make your monthly payment on or before the due date, then:

You have a 15-day grace period to submit the payment
15 days past due, your payment is officially past due and you may be charged a late fee
30 days past due, your loan is in default and you may be charged additional fees
Once your loan is in default (30 days past due) it may be listed on your credit report
36 days past due, your servicer is required to try to make live contact with you
45 days past due, your servicer assigns a team and sends you written notice
A new late fee may be added each month for each payment that’s overdue
121 days past due, your loan may be referred for foreclosure

The end result of missed mortgage payments without making alternate arrangements with your lender is foreclosure proceedings and losing your home.

What Happens If You Fall Behind on Mortgage Payments?

If you’d like to avoid finding out what happens when you can’t pay the mortgage debt, it’s important to contact your mortgage company as quickly as possible. Most mortgage lenders have short-term options available to help clients get through a crisis.

Be prepared to discuss:

The reasons you fell behind on payments
Whether or not the situation is temporary
Your current income and job details

Keep in mind that a lender generally does not want to foreclose on your home—they are not in business as real estate agents and may lose money on short sales resulting from foreclosing on your property. Their best outcome is to help you get back on track with monthly payments and remain in your home.

If your situation is temporary and you can return to making mortgage payments, your lender may agree to one of the following.

1. Mortgage Reinstatement

If your hardship was short-term and you can get help from family or other resources, you could get your mortgage loan reinstated without changes to its original contract terms. Generally, a reinstatement requires paying a lump sum that includes:

All missed mortgage payments and currently due mortgage payments
Late fees
Reinstatement fines or charges
Additional interest on your missed mortgage payment

2. Repayment Plan

A repayment plan involves a contractual agreement to pay down your overdue payments over a period of time. This would be in addition to returning to paying your regular monthly mortgage amount. However, rather than coming up with the entire overdue amount, you’d be able to repay it over time.

3. Forbearance

Some lenders will allow mortgage forbearance in recognition of a temporary financial hardship that can be overcome. During a set period, your monthly payment may be either reduced or temporarily suspended. However, there are several pros and cons of mortgage forbearance that should be considered heavily before you let yourself get to this point.

Options to Consider If You Can’t Pay Your Mortgage

If you missed a mortgage payment, there are protections and aid available to help you avoid losing your home and minimize the damage to your finances if you do end up in a foreclosure process.

If your mortgage can’t be addressed in a way that allows you to work with your lender to get back on track, consider the following options.

1. Connect with a Housing Counseling Expert

Let’s start with an option that’s really an early step to help you make further decisions—working with a HUD-approved housing counselor at no cost to you. These counselors can:

Act as an advisor to you and advocate for you with your lender
Help you understand mortgage assistance options appropriate for you
Explain documents and processes
Identify local resources and programs available to provide additional help
Help submit documents to your mortgage company
Work with you on creating a budget that includes monthly mortgage payments

Borrowers in mortgage arrears have more successful long-term outcomes when they work with housing counselors—and since this is a free resource, you’ll just need to invest your time. You can get the process started by calling 888-995-4673.

2. Utilize Your Home Equity

If you’ve been making payments over time, then you’ve built up equity in your home—and if your property has increased in resale value since you bought it, that’s also boosted your equity.

You can determine equity by subtracting the amount you still owe on your mortgage(s) from the current market value of your home.

Home equity loans, home equity lines of credit, and second mortgages are avenues to tap into your equity, but they may require high credit scores and/or up-front costs that would be a struggle at this time.

Sale-leaseback programs offer a home equity loan alternative that allow you to convert your home equity to cash without the roadblocks of credit qualifications or closing costs.

Traditional lenders often make it difficult for homeowners to tap into their home equity without pristine credit reports and histories. However, sale-leaseback solutions offer an option that can keep you in your home and help you meet urgent financial needs.

3. Refinance Your Mortgage

If you can’t pay your current loan, it may seem illogical to ask for a new one, but a mortgage refinance to extend the life of your loan could reduce your monthly payments. For some borrowers, a lower monthly payment may make enough difference for them to return to making monthly payments.

However, there are definite downsides to this option. Refinancing under these circumstances could:

Incur high fees for breaking your original mortgage
Require closing costs of 3–6% of the loan amount
Cost you significantly more in interest over the life of a longer loan
Result in a higher rate based on the current mortgage interest rate versus your original rate

For more information on this option, learn how to do a cash out refinance.

4. Negotiate a Mortgage Modification

When you refinance or apply for a new mortgage, the loan terms you accept include two key factors that are critical to calculating the amount of your monthly payment. These are:

Interest rate
Loan term (10, 15, or 30 years)

A mortgage modification is similar to a refinance in that it may change either (or both) of these factors, but without going through the full process of refinancing qualification, appraisal, and closing costs. The availability and terms of a loan modification depend on your lender’s policies. For more details on this option and how it stacks up against a refinance, check out our comparison of a loan modification vs. refinance.

5. Short Sale

We’ve entered the zone of options that involve losing your home but provide more stability and credit protection than a foreclosure.

With a short sale, your mortgage servicer agrees to allow you to put your home on the market at a price less than what you still owe on it. If you don’t have equity built up in your home and cannot afford to pay your balance and future monthly payments, a short sale is a better option than having a foreclosure on your credit history.

If an offer comes in over the listing price in a competitive market, it may boost your ability to pay off your mortgage. However, in most short sales, you end up still owing on a mortgage without retaining your home.

6. Deed-in-Lieu of Foreclosure

A deed-in-lieu of foreclosure (DIL) is a last-ditch choice if you’ve exhausted other options. Similar to a short sale, you lose your home with this contract. A DIL involves transferring ownership of your property to the mortgage lender in exchange for being released from your loan and any further payments.

On the positive side, you’re walking away without any further entanglement with the loan, but you’re out both a home and any possibility of recouping equity through a sale.

What to Avoid If You’re in Default or Foreclosure

If you’re at risk of losing your home, your credit, or paying fines and fees, knowing what to avoid as well as what your options are will arm you for success. Watch out for:

Scams – If there’s a group of people in desperate straits, then someone is going to try to take advantage of them. Watch out for any offer of counseling, services, or “help” that includes you paying money to someone other than your mortgage provider. Also, remember that HUD-approved housing counselors are free to you. Anyone offering advice or advocacy at a cost to you is not part of this program.
Avoidance – It’s hard to ignore the fight-flight-or-freeze response we often have in frightening circumstances, but the longer you wait, the worse the situation will become and the fewer options there will be available to you. Despite the stress of late or missed payments, don’t ignore or avoid communications. Be sure to open and review all correspondence from your mortgage provider. Keep calm, read your mail, and answer your phone.

Key Takeaways

If you are concerned that you can’t pay your mortgage on time, contact your mortgage lenders as soon as possible. Most lenders have short-term options available to help clients get through a crisis. If you’ve already fallen behind on payments, connect with a housing counseling expert or with your financial advisor to learn more about what financial solutions (sale-leasebacks, mortgage modifications, sales, etc.) might be available to you.

Sources:

Consumer Financial Protection Bureau. Homeowner’s Guide to Success (PDF). https://files.hudexchange.info/resources/documents/Homeowners-Guide-to-Success.pdf

Making Home Affordable. Find a Housing Counseling Expert. https://www.makinghomeaffordable.gov/get-answers/get-answers-how-to-find-housing-counselor

NextAdvisor. Why Refinancing Might Be Your Best Option to Fund Home Improvements Right Now. https://time.com/nextadvisor/mortgages/refinance/home-improvement-refinance/