If you’ve recently fallen behind on mortgage payments, don't give up hope. Homeowners who are late on their mortgage payments have options for avoiding foreclosure.
1. Refinance your mortgage
Best if: You have good credit to qualify for a low interest rate, and you plan to stay in the home for a while.
Refinancing, which allows you to get a new mortgage with new terms, can substantially lower your monthly payment if you qualify for a lower interest rate. But keep in mind that eligibility for a refinance depends partly on your financial situation. You’ll generally need a:
- Credit score of at least 620
- A debt-to-income ratio of 43% or less
If you’re behind on mortgage payments because your adjustable-rate mortgage is causing your interest rate to change periodically, then refinancing into a fixed-rate loan can help stabilize your payments. Before moving forward with a refinance, you should also consider how long it will take to recoup upfront costs, which average $5,000 on refinance loans.
For example:
If refinancing saves you $100 a month and you pay $5,000 on closing costs, then you’ll break even in about four years — making this option viable only if you intend to stay in the house for some time.
Learn More: Mortgage Refinancing Calculator
2. Apply for mortgage forbearance
Best if: You can’t afford mortgage payments due to a temporary financial issue, such as a job loss.
Mortgage forbearance allows borrowers to temporarily suspend or reduce their mortgage payments for a specified period of time — without worrying about additional fees and interest. But when you call your loan servicer to check your forbearance options, ask how they plan to report your account to the credit bureaus.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, lenders might be required to report your account as “current” if you’re enrolled in a forbearance program. Some lenders also aren’t reporting late payments, or they’re waiving late fees for borrowers due to the pandemic.
Keep in mind:
Forbearance doesn’t mean your payments are forgiven. You’ll need to make up the payments through a lump sum or installments after forbearance ends. Before enrolling, ask your lender about how it works.
Learn More: How Much Does It Cost to Buy a Home?
3. Negotiate a loan modification
Best if: You’re already behind on mortgage payments and need help making permanent changes to your mortgage terms.
Homeowners with demonstrated financial hardship can also contact their lenders and apply for a loan modification. Unlike forbearance, which is temporary, a loan modification is an agreement with your lender that permanently changes your existing home loan terms.
Depending on the program, the lender may agree to extend your loan term or reduce your interest rate. The goal is to make your monthly payments more affordable, but you don’t have to qualify for a new mortgage or come up with closing costs.
Here are some of your options:
- Flex Modification program: If your home loan is owned by Fannie Mae or Freddie Mac, you might qualify for this program. You’ll need to show you’re behind on your mortgage payments, why you’re going through financial hardship, and how you plan to get back on track.
- Ask your lender: Some lenders offer their own loan modification programs. Call your loan servicer and ask about your options, whether the loan changes will be permanent, and how they plan to report your account to the credit bureaus.
Find Out: Loan Modification vs. Refinance: How to Decide
4. Reduce your monthly housing payment
Best if: You’ve found ways to cut down on your taxes and insurance.
A homeowner’s monthly house payment encompasses more than just principal and interest — it also includes insurance, taxes, and other fees. If you need to put some wiggle room in your budget, you can consider these ways to reduce these costs:
- Lower your homeowner's insurance bill. There are several ways to save on homeowners insurance, which protects your home following certain losses. Getting quotes from multiple providers can help you potentially find a cheaper rate, but you can also ask about discounts, raise your deductible, and bundle your homeowners and auto insurance policies to save money.
- Research tax abatement laws. A tax abatement allows you to dispute your tax bill or correct billing errors, which may result in a lower tax bill and a lower housing payment. If you feel your property is overvalued, disproportionately assessed, or classified incorrectly, or you feel you qualify for an exemption, check your local government website for tax abatement rules.
- Check your home value. Some homeowners delay removing private mortgage insurance even after they’re eligible to do so — which can be done once they’ve established 20% equity in the home. If your loan balance has reached this point, call your lender and ask them to remove PMI.
5. Set up a repayment plan
Best if: You have room in your budget for a higher mortgage payment.
If you’re still wondering what to do if you can’t pay your mortgage, call your lender and ask about a customized repayment plan. Your lender may work with you, especially if you can show your income has stabilized. They may take your past-due amount and add it to your upcoming mortgage payments, spread over a few months.
Tip:
The length and term of the repayment plan are up to the lender, but make sure you can handle the higher payments before agreeing to the plan.
