Money Talks, So Should You

Crisis Button: I'm about to miss a mortgage payment

Tom Anderson
by Tom Anderson, Dimespring Contributor  (@bytomanderson)

So, you're about to miss a mortgage payment and things feel like they couldn't get any worse.

Breathe.

Many struggle with similar problems as 11.3 percent of all mortgages were either delinquent or in foreclosure as of March 31, according to the Mortgage Bankers Association. Banks usually offer a grace period of 10 to 15 days, but after 30 days your mortgage is considered to be in default.

But you can possibly avoid losing your home if you follow these steps:

Step 1. Contact a housing counselor agency. These folks help you examine your financial options and prepare you to speak with your mortgage servicer. The U.S. Department of Housing and Urban Development along with state housing authorities keep lists of free or low-cost housing counselors. Reputable counselors may charge a nominal fee for the services, about $35 to $50, to check your credit report and for budgeting services.

But watch out for counselors that want hundreds of dollars in fees. Best to stick with an organization vetted by the feds or state officials.

READ: Q&A: How do payments affect my mortgage?

Step 2. Call your mortgage servicer. Most people wait too long to call the bank out of fear. You build good will by letting your servicer know before you miss a payment. When the financial crisis started, banks were less willing to cut borrowers a deal. But for the past two years, servicers are more open to negotiating a solution. (This comes as the federal government along with 49 state attorneys general reached a $25 billion settlement with five major banks in February.)

You need to be patient on the call. Volumes have spiked since the financial crisis and you may have to wait awhile to reach a human. Servicers rarely accept partial payment, but don't spend the money you set aside for the mortgage on other expenses. You will likely be eligible for some assistance if your home is the primary residence and your mortgage payment is more than 31 percent of your income. On the call, ask if you qualify for the federal Home Affordable Refinance Program or similar federal or state programs.

READ: 2 smart steps to buying a home in foreclosure

Step 3. Get on a budget. You will have to rein in your spending regardless of whether you work out an agreement with the servicer or a housing counselor. Take a hard look at your monthly expenses. Figure out what brought you to the brink. Before the Great Recession, a medical emergency or an expensive car repair were common reasons for missing a mortgage payment. Now, with 8.2 percent unemployment, job loss is the most likely culprit. Knowing the root cause of the problem sheds light on the solution.

If you can't afford your mortgage because of a financial hardship, such as losing your job or medical expenses, you may qualify for federal and state assistance programs. Include necessary items such as child care and car repair in your budget calculations to reflect what you actually need to live on.

READ: Does buying a home really have to be so hard?

Step 4. Or sell and rent. Back when the real estate market was more robust, the specter of missing a mortgage payment was easier to solve …  you would simply sell your home. This may still be a viable option if you live in a solid real estate market, such as Phoenix, San Francisco or Washington, D.C. Even though money is tight, you will have to spend to maintain your home while it's on the market.

Get referrals from neighbors and check Realtor.com to find reputable real estate agents in your area. Use Redfin to estimate the current value of your home to get a sense of how you will make on the sale.

READ: Here's why you need to hustle if you want to buy a home on a short sale

Step 5. Or go short. A short sale, selling a home for less than what is owed to the bank, might work in some cases. Find a real estate agent with experience in short sales because it's a difficult maneuver to pull off.

You need the servicer's cooperation and usually you will be attempting a short sale of your home as the servicer forecloses on it. But a successful short sale can avoid a foreclosure, which will hurt your credit score.

 

Tom Anderson is a freelance writer in Brooklyn, N.Y. His work has appeared in Forbes, Kiplinger’s Personal Finance and Monocle.