What are my options if I can't afford my mortgage?

A lot can happen in 30 years

The average mortgage has a 30-year term, which is 360 monthly mortgage payments. 30 years is a long time to expect that all will run smoothly and there will be no “bumps in the road” financially or otherwise. 

No one who buys a home dreams of losing it one day down the road. When life throws us curve balls like job loss, injury, or illness, the reality that the house is now unaffordable is painful. However, there is life after foreclosure and letting the home go in some cases is the best option. That may sound odd, but bear with me…

Once you have decided that the home is no longer affordable that opens you up to another list of options!

Selling the home to capture equity

If you have equity in the home, selling the home can put you in a great position to not only cut ties with the home that has turned into a financial stress but you can also walk away with some equity to start fresh. 

If you aren’t sure what the home would sell for in the current market talk with at least two realtors for a fair market analysis.  Even if you have already had your sheriff’s sale you can sell the home up until the day you need to leave the home.

Deed in lieu of foreclosure

This allows you to hand the property back over to the bank, as long as it meets conditional requirements. This is best if you already have a place to go and are looking to cut ties with the home as soon as possible.

Short sale

A short sale entails working with the bank and a local realtor to help find a buyer for the home. This options often usually to the benefit of the lender vs the homeowner.

This can be a good option if you have already moved out and wouldn’t be impacted by showings on the home. Note: there may be tax consequences for the forgiven debt by the lender when accepting a sale that is lower than what is owed on the home.

Living “rent free” until the end of the redemption period

In some cases moving on right away is not the best option. In Minnesota you have the right to live out the redemption period in the home, allowing time to save money and make new housing plans. 

Depending on your loan/property type, you'll have either a 6- or 12-month redemption period. So if you have no equity in the home you may benefit from using the time to pack, plan, and save money.

*These may or may not be options, depending on who your lender or investor is, the reason the default occurred, and how far into default you are. Further, participating may or may not be wise based on:  A) whether or not your state is a recourse state (meaning that it allows banks to seek deficiency judgments on lost proceeds via foreclosure), B) what the value of “free rent” remaining in the home through the legal foreclosure process is worth, and C) whether or not participating will lead to some extent of taxation. Since you may get up to $3000.00 for participating in these non-retention options, it is worth exploring. However, make sure you have spoken with a tax advisor and a local HUD housing counselor before making a decision.

Borrower relocation assistance plans or cash for keys

Even if you are not offered or do not agree to a short sale or deed in lieu of foreclosure, you may still be able to work with the bank or attorney’s office on trading a peaceful exit for cash.

Borrower Relocation Assistance is on a case-by-case basis and is usually offered by a third party realtor or property management company who is assigned to facilitate the process of securing the property once the redemption period is over.

The idea is you would vacate the property with it being in the same condition a typical homeowner would leave a house they sell in a real estate transaction.

If all the items are there that are usually left behind (fixtures, appliances, garage door openers, etc.), the kitchen and bathrooms are fully operational, and there isn’t any personal stuff (i.e., trash) left behind — you may be able to get paid for doing the right thing.

Timing is everything

Your local HUD Housing Counselor will help you understand how much time you have in your property based on your state's laws.

Though the length it takes for a foreclosure to run its course is dictated by state law, the national average runs around 11 months after the notice of default or intent to foreclose is filed (which usually is filed after 3 to 6 missed payments).

Some people may have the ability to move in a very short period of time, while others may need several months to move successfully. Plan accordingly to abide by your state's laws.

Moving on

Letting go of the home can be an emotional process, especially if the mortgage delinquency was connected with a painful experience.  Here are a couple of things to keep in mind:

You are not defined by your home, nor by the event that caused you to fall behind on the mortgage.

A house is just a house and if it is time to let it go then it is time.

Don’t confuse homeownership with independence and freedom.

There is a tremendous amount of freedom that comes with being a renter. You are no longer physically and financially responsible for the repairs of the home. 

Also, if you are a traveler renting an apartment allows you the freedom of locking your door and not worrying about if the lawn is mowed or the pipes are freezing while you are gone.  There may be a time when you choose to become a homeowner again, but until then… enjoy it.

Save money and get back into a routine

Obviously, those going through foreclosure don’t typically have an abundance of income. However, the reality is that unless you are moving into the basement of a friend or family member’s home rent-free, you will have a responsibility to prioritize housing back into your budget.

Why not start early?

For example, you have six months left in your home and replacement rent will be $800 per month with utilities remaining the same. Start setting that aside monthly as soon as possible.

It will be a lot easier to gradually step up to the routine of putting aside the money, rather than waiting until you move — especially considering moving expenses these days. Plus, you'll have money built up in case of emergency at the end of that 6 months.

If you are considering your options for saving your home from or moving on after foreclosure, housing counselors with LSS Financial Counseling can help. Figuring everything out on your own can seem stressful and overwhelming, but it doesn't have to be. Give us a call at 888.577.2227 for your free housing counseling session from a local, trusted nonprofit.

Author Ashley Hagelin is a HUD Certified Housing Counselor with LSS Financial Counseling.