Buying a home and moving in is a big step in most people’s lives. While closing and moving in represents the completion of one goal, so begins the next phase of responsibility. Across the United States, approximately 9 of every ten home buyers will finance their purchases with a mortgage, meaning that you are now responsible for making your mortgage payment each month for the duration of the loan. If you hit a financial speedbump and miss just one, catching back up can be difficult.
Why Do Homeowners Fall Behind on Payments?
There can be many reasons why homeowners fall behind on their mortgage payments. Some of the most common include:
- Purchasing a home you can’t afford.
Despite lenders being more cautious than ever about issuing a mortgage, there are still circumstances where this can happen.
- Emergency medical expenses.
For uninsured or underinsured Americans, a trip to the emergency room can put a serious dent in their household finances.
- Loss of income.
Months of unemployment can make it hard to pay your bills while everyday needs like food and gas can eat up the money you have coming in.
- Interest rate increase.
Some mortgage types allow the interest rates to fluctuate over time which can increase your monthly payment higher than expected.
The prospect of defaulting on your home loan can be a terrifying experience. Understanding your options and taking action on a plan for getting back on track is very important if you begin to miss payments.
Understand Your Mortgage Type
By being aware of the kind of mortgage you have and how the interest rate works, you can avoid issues with the payments. The 30-year fixed rate loan is a staple in the mortgage industry and the preferred instrument of approximately 90% of Americans who end up financing their home. Outside of the 30-year fixed, there are adjustable rate mortgages (ARMs) which change based on a predetermined schedule.
A combination of the fixed rate and ARM can be found in the Hybrid ARM loan. These typically have a fixed rate for a designated amount of years, after which the interest rate can change. If you have a hybrid ARM and want to stay in control of your payment amount, a common tactic is to strengthen your credit rating during the first years of the loan and then apply for refinancing.
What You Can Do if You’re Behind on Your Payments
If you find yourself behind on your home payments, the best thing you can do is to be proactive about the situation and contact your lender to explain what’s going on. Most lenders have steps in place to help borrowers who have fallen behind. They are also likely to be more understanding than upset when the payment doesn’t come through.
Negotiate with Your Lender
Some lenders might offer a repayment plan where you can catch up on the amount you’ve missed in small increments. These increments are added to your monthly payments for the upcoming months. This repayment strategy is probably only going to be an option at the beginning when you aren’t too far behind on your payments.
Another option is changing the terms of your loan through a loan modification, also known as “restructuring”. Some forms of loan modifications your lender might approve include:
- Extending the length of the loan
- Decreasing the interest rate
- Decreasing the amount of the mortgage debt
Other Ways to Avoid Foreclosure
If you’ve realized that your mortgage is too much for you to keep paying, here are 3 steps you can take to get out of the loan:
1. Sell the home
Sell the home before you fall too far behind on payments. If the home has appreciated in value since your purchase, you may be able to sell it for more than you owe and pay off the mortgage. Before deciding to take this route, make sure you do your homework and come up with a realistic idea of how much you can expect the sale of the home to garner. Check recent sales of comparable homes in the area along with any renovations you’ve done that might add to the asking price.
2. Rent the home
Renting to a new tenant can be a viable option to bring in some cash and pay the mortgage. Keep in mind that being a landlord comes with its own challenges and expenses, but it can help you keep your home and possibly even turn into a profitable alternative.
3. Short sale
If your lender is open to it, you can agree to a short sale. A short sale occurs when you sell the property and the lender accepts the amount collected from the sale as repayment of your mortgage. The amount is often lower and the mortgage is reported to the credit bureaus as settled instead of paid. While this may have a negative impact on your credit score, it’s much better than foreclosure.
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If I Miss a Payment Will I Go Under?
One late or missed payment will not cause you to go under, but it can carry serious consequences. The lender could report it as a delinquency on your credit report, which can also lower your credit score.
Housing and Credit Counseling
If you are still reluctant to talk to your lender directly, another option is to speak to a counselor to get a better idea of your options. A counselor can guide you through your options and help you decide what’s best given your circumstances. If your mortgage is backed by the Federal Housing Administration, there are housing counselors that can walk you through numerous programs designed to help you keep your home.
If you’re facing financial trouble and missing mortgage payments, the best thing to do is stay calm, assess the situation, and communicate with your lender. By properly dealing with the situation you can avoid going into foreclosure and losing your home.
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