Behind on Your Mortgage? Options to Help Keep Your Home
Job loss, a reduction in income, injury or other medical issues, or separation from a significant other can greatly impact your ability to keep up on your mortgage payments. With the pandemic, you are even more likely to experience these losses and have difficulty staying current on your mortgage. Missing payments can adversely affect your credit; even worse, this initiates the process towards foreclosure on your home. Fortunately, there are tools and remedies to help get you back on track.
In writing this article, I make several assumptions and caveats.
- The time frames and potential options pertain primarily to homesteaded residential properties in the state of Minnesota.
- Although there are some programs in place to temporarily help people stay out of foreclosure, ultimately the same general rules and tools still apply to the foreclosure process. These standard rules are what I will discuss.
- The homeowner in this example is dealing with late mortgage payments for the first time and intends to keep the home.
- In the state of Minnesota, there are two different types of foreclosures: Foreclosure By Advertisement and Foreclosure By Action. Foreclosure by Advertisement is the most common, so for the sake of simplicity, I will focus on that.
- None of the following information is legal advice. Be sure to consult with a reputable attorney regarding bankruptcy or other legal questions.
Learn these terms if you fall behind on payments
Imminent Default and Strategic Default
If a borrower has not missed any monthly payments but foresees difficulty in making future ones, this is known as “imminent default.” This is the best time to contact the mortgage company to try and avoid missing payments. Be careful of “strategic default,” which means that you intentionally miss payments in order to be considered for a remedy. LSS will never encourage anyone to miss a payment on purpose.
Unfortunately, when you contact your mortgage company before missing a payment, they are unlikely to provide you many (or any) options. Since you are still technically on time with your payments, the mortgage company may (falsely) interpret that you don’t need assistance.
However, if one or a combination of events happen and you are proactive, you increase chances for assistance while remaining current on the mortgage. These events are the “3 Ds” of Imminent Default:
- Death. Someone on the mortgage or a main source of income for the household has passed away.
- Divorce. Someone attached to the mortgage will no longer contribute to the household after the breakup.
- Disability. Someone who a source of income in the household can no longer work due to disability.
Whether you are under imminent default or have already missed payments, you will likely deal with one or more departments in your mortgage company.
If you start to miss payments, the collections department will be one of the first to contact you. This department generally has one goal only: collect the missed payments. Their representatives will often reach out to you monthly by phone, mail and email to try and collect the missed payment(s). The collections department typically does not provide home retention options, though occasionally in smaller mortgage companies that department may handle both.
This department will also likely contact you if you miss a mortgage payment. It reviews your current financial situation and explores options to avoid foreclosure. You will often have more communication with loss mitigation than with collections, especially if you are trying to keep the home.
Even though the loss mitigation department is involved, collection activities often continue. You might wonder why collections is contacting you when you have been working with loss mitigation. Unfortunately, the two departments are not always on the same page, so until the mortgage is brought current, collection activities might continue.
Options to help you keep your home
This is essentially a pause in mortgage payments. For example, if you face extended unemployment, an injury or a medical-related incident, you may be offered temporary relief from making payments until your situation changes. A forbearance can be just a month or two, but in some cases, it can be approved for up to 12 months.
Forbearance is a temporary solution, which will hopefully lead to a permanent plan. Also, these delayed payments will have to be paid back eventually, sometimes in one lump sum. Therefore, it’s important to only agree to a forbearance if it is affordable.
Note: The CARES Act, signed into law on March 27, 2020 in response to the COVID pandemic, requires all federally-backed mortgages (FHA, VA, Fannie Mae, Freddie Mac, USDA) to allow mortgage holders 180 days of forbearance and the right to apply for an additional 180 days after that. The CARES Act also provides additional benefits a normal forbearance does not have:
- The mortgage company cannot report the homeowner as delinquent on their credit report during forbearance.
- The mortgage company is required to work with the homeowner at the end of the forbearance to develop a permanent solution to the delayed payments. However, what that solution will be is uncertain.
This is an agreement between you and the mortgage company which spreads out the past due amount owed over a set period. During this time, you must make the normal monthly mortgage payment, too. If the repayment plan’s time frame is short, which most are, you will have to pay a considerable amount of money to cover both the normal payment and past due amount.
For instance, let’s say your payment is $1,500, and you missed two payments; you now owe $3,000. The mortgage company may give you three months to pay it back; your total monthly payment for those three months would be $2,500/month. Because this temporary increase in payments might be difficult to pay, repayment plans aren’t always a realistic option.
This remedy is unique to FHA loans, although conventional loans might offer a similar solution under a different name. Whatever it is called, a partial claim sets the past due payments aside from the main mortgage into a secondary “soft lien” that bears little or no interest and thus removes the risk of foreclosure. The homeowner would only have to pay this soft lien once the main mortgage is paid in full or refinanced or if the property is sold.
A modification accomplishes two things: it gets monthly mortgage payments back on track and keeps those payments affordable. This is the most common remedy that a mortgage company offers.
A modification is different from refinancing. The former revises your existing mortgage, while refinancing requires you to qualify for a brand new mortgage. To qualify for a new mortgage, you must meet basic criteria: good credit, steady income, and a reasonable debt-to-income ratio. The same qualifications do not apply for a modification.
Don’t assume that you have a right to a modification if you fall behind on payments. A mortgage company is not obligated to modify a mortgage. In the original mortgage paper work you sign at the closing, one of the first lines states, “I promise to pay.” However, most mortgage companies do offer some sort of modification program, especially if this is your first time missing any payments.
Another note: If you’re able, you can pay the entire past due amount owed at any time, which brings the mortgage current immediately. All monthly payment amounts will go back to the regular payment.
Get the support you need
The most important first step is for you to contact your mortgage company and ask about the tools listed above. If you are having problems making payments due to COVID-19, be sure to mention that. During the COVID-19 pandemic, all mortgage companies are experiencing an increase in calls. Be prepared to be on hold for an extended period. Also, check out the mortgage company’s website for helpful information and links to apply for the above solutions directly online.
LSS Financial Counseling is here to help Minnesota residents with free, expert foreclosure prevention counseling and advice. If you live in MN and are worried about your mortgage payment, call 888.577.2227 to schedule your free phone session or ask any questions.
If you’re outside of MN, visit the HUD website to find a local counseling organization. Keep in mind that all HUD-approved counseling is free. Never pay for help with your mortgage.
If you’d like assistance creating a realistic budget and plan to build up savings or pay off debt, LSS can help you, too. Call 888.577.2227 today or get all your support online.
This article is the first in a three-part series on foreclosure prevention. In Part 2, I will discuss the steps up to a loan modification and how a modification works.
Author Dan Park is a Certified Financial Counselor with LSS Financial Counseling.