Are you struggling to make your mortgage payments on time? If so, you’re not alone. Over a quarter of Americans have seen their financial situation worsen since buying a home, and about 66% of Americans struggle to make mortgage payments on time. Thankfully, there are things you can do to help yourself avoid the pain of foreclosure and the accompanying drop in your credit score.
Understanding the Foreclosure Process
You don’t lose your home as soon as you miss a mortgage payment. In fact, you have a 15-day “grace period” in which you can make your payment without having to pay additional fees. However, after this grace period is up, you’ll have to pay up to an extra 5% of your mortgage payment for each month that you miss payments. After 45 days, you’ll get a written notice of delinquency from your lender. This letter will let you know you’re behind on your payments and tell you how much you owe.
When you fall more than 30 days late your lender will report you to the credit bureaus. Even a single late payment can decrease your credit score by over 100 points, which will make it hard for you to obtain any type of loan or credit you could use to try to save your home. At this point, you’ll also get a demand letter from your lender, warning you that the lender will start the foreclosure process on your home if you don’t make the needed payments. Once your loan is four months overdue, the lender can start the legal process of foreclosing on the home. You can still save your home at this point, but you’ll need to not only cover all monthly payments and late fees but also the lender’s legal fees. In some states, you can even redeem your home after it’s been foreclosed on and sold if you pay your home’s buyer the full purchase price and other costs. If you’re unable to do so, your home may be gone for good. You may get some money from the sale if the house is sold at a profit; however, foreclosed homes usually sell below market price and the money from the sale must first pay back the lender and cover any costs associated with the sale.
Preventing Foreclosure: What are the Options?
Assess your financial situation carefully to make sure you’re able to cover upcoming mortgage payments. If you need professional advice, HUD’s website has a list of financial counselors who offer free foreclosure prevention counseling. If you can’t make your monthly payments on time, reach out to the lender right away to discuss your situation. Lenders aren’t eager to foreclose on borrowers. They’re not in the property management business and often lose money on properties that must be cared for and maintained until they’re sold.
Your lender may be open to offer mortgage loan forbearance or loan modification. Forbearance defers payment until after a specified period of time. You’ll still have to make all your payments and interest will accrue on your loan during the forbearance period; however, you’ll have time to catch up on payments, so you don’t risk foreclosure. To obtain forbearance, you’ll need to show proof of your financial hardship, be it job loss, divorce, illness, etc. Your lender will notify credit bureaus about your situation, which means your credit rating will drop. However, it won’t drop as low as it would if the lender were to foreclose on your home.
Alternatively, you may qualify for a mortgage loan modification. Once again, you’ll need to show proof of financial hardship. After you do so, it’s up to your lender to decide which modification options to offer. Your lender could extend the period of the loan. You’d have to pay more overtime, but your monthly payments would be lower than before. Alternatively, your lender may reduce the loan’s principal, which would give you more equity in the home and lower payments. However, some states count this reduction as taxable income, so it’s wise to talk with a CPA before proceeding. If you have an adjustable interest rate, your lender may offer to convert your loan into a fixed-rate loan. Some lenders may offer to refinance the loan at a lower interest rate.
Bear in mind that none of these options eliminate your loan payments. If you feel you’d be unable to make payments long-term, it may be wise to consider selling the home. It’s not a pleasant prospect, but it’s far better than going through a foreclosure. Your credit remains intact, and you may be able to turn a profit on your sale that will enable you to rent or even buy a more affordable house.
If you can’t make your monthly mortgage payments, don’t despair. You have options that will enable you to avoid foreclosure and the pain that comes from being evicted from your home. However, to avail yourself of these options, you’ll need to take action as soon as you realize you can’t make your payments. Doing so will enable you to see which forms of relief are available to you so you can pick the option that works best for your situation.
If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].