If you’re like millions of Americans right now, you’re struggling to keep up with your finances. You’re experiencing anxiety and stress about your future. You want to keep your home but you can’t make mortgage payments and are worried you’ll end up on the street. You just want to dig your head under the sand and hope everything gets better on its own. The bank calls you, you see their phone number on your caller id, and you dread what they might say. You ignore their calls.
That’s the worst thing you can do right now.
Do not avoid your lender. Let your bank know what’s going on and don’t miss payments without letting them know. I know you may be feeling overwhelmed, stressed out, and depressed, but there is a way out of this. Here’s how.
Find out who owns your mortgage
Your loan servicer is not necessarily the owner of your mortgage. What does that mean?
Your loan servicer is the entity or bank that sends you your statements, answers your phone calls, handles your payments, etc. However, the actual money, the loan itself, might be owned by a third party. The vast majority of loans are backed, in some way, by the federal government. You’re given more leniency and options if your mortgage is backed by a federal entity (Freddie Mac, Freddie Mae, HUD, the VA, etc).
An easy way to find out who owns your mortgage is to call your loan servicer and ask. Alternatively, you can use Fannie Mae’s “Loan Lookup” tool online here. You will gain clarity in what your next steps should or could be once you find out.
Ask for a Special Forbearance or a Deferral
The first step you should take if you can’t pay your mortgage is to seek out a “Forbearance.” Simply put, forbearance is a postponement of your payments. It provides you with a period of time where you are not required to make any payments. It also provides you with relief from potential late fees, delinquent reporting to the credit bureaus, and prevents the bank from foreclosing on your property. Federally backed loans qualify for up 12 months of forbearance. Non-government backed loans will qualify for less.
But Beware, forbearance is not payment forgiveness. You will still be required to make those payments at some point in time. At the end of your forbearance period, lenders will expect you to get caught up on the payments you’ve missed. Some lenders will require you to pay back missed payments in a lump sum at the end of a forbearance period. But, most lenders will give you the option to get caught up in alternative ways. Make sure you know what your options are for paying back these missed payments. Get them in writing.
Although it’s not common, some lenders may let you defer payments upfront. This means they will postpone payments to be due at the end of your loan term. So, for example, if you miss three months of payments, those three months of payments will be due once you’ve finished paying down your mortgage, when you sell the property, or when you refinance.
Ask How Long You’re Eligible to be on Forbearance
In the beginning stages of home retention, it’s important to get as much clarity as possible. Knowing exactly what your options are and how long you have them for will be crucial for your ability to plan your way out. Find out how long you are able to stay on forbearance or how many months you will be allowed to defer. Know exactly when your next payment will be due.
Federally backed loans are eligible for 12 months of forbearance and that is guaranteed by law. However, forbearance terms for non-government backed loans will vary. If this is your case, you’ll need to call your mortgage servicer and ask how long you will be allowed to be on forbearance. If you’re one of the lucky few that qualifies for a deferral, you will be asked to make your next payment three months from your current due mortgage payment. Find out exactly how long you’ll be allowed to be on forbearance or how many payments you’ll be allowed to defer.
If possible, record the representative you’re speaking to (ask them if you can). Even better, get everything in writing. Read and understand every letter that’s sent to you. It’ll come in handy for if/when you may need to get lawyers involved.
Know Your Options and Have a Plan
There are a few ways out of this. Depending on your circumstance, you should figure out which one works best for you.
The first way is the simplest but also the one you’re probably least likely to be able to pull off. That is, the simplest way out of forbearance is to pay back all the months of missed payments by the end of the forbearance term in a lump sum. This is known as “reinstating.” In all likelihood, if you’re in a forbearance it’s because you’re short on funds and you won’t be able to pull this off. But if you are able to do it, then you should. Unfortunately, you might have to sell some of your other assets in order to get caught up on things.
Another way out is to ask for a deferral at the end of your forbearance period. A deferral is when you take the amount past due now and you make it due at the end of the loan term. That amount would then be due after you’re done paying off your mortgage, when you sell or transfer the property, or when you refinance.
A good way to deal with this eventual “balloon” payment is to start up an interest-bearing savings account that you deposit into until you have enough to cover that eventual payment. The “deferred” sum sits at the “back” of a loan term and doesn’t accumulate interest, so you know exactly how much you’ll need to pay. A more immediate way to get a deferral paid off is to seek out a refinance. A refinance is a new loan used to pay off the entirety of the old one (and the deferred amount). You can seek a refinance from the same bank or even shop around for lower rates.
Not everyone will be given the deferral option. Ask your loan servicer whether it would be an option for you. They may tell you something like, “a deferral is not guaranteed at the end of your forbearance,” in which case, hope for the best but prepare for the worst. Have a plan B.
If you, like many, have been forced to go back to work for a lower salary, you might no longer be able to afford your current monthly payments. In this case, you want to look into a loan modification. This option will take your past due amount and lump it into a new “modified” loan designed to make your payments more affordable. A lender cannot modify your loan in a way that’s not affordable to you; this means that if you report having no monthly income, or even negative income, the bank will not approve you for a loan modification.
Lastly, if you‘re one of the lucky few that have been able to recover their job and income and have the ability to pay down the past due amount in increments, you can ask for a repayment plan. This option would allow you to spread out the past due amount across several months so that you don’t have to pay it all at once. You would need to make your regular monthly payments alongside payments towards your outstanding balance. In other words, your monthly payments would be larger for some time until you pay down all of the past due payments.
Look for Government Resources and Additional Support
If your lender can’t find a solution for you, or the solution they’re providing doesn’t work for you, reach out to a government agency. The Department of Housing and Urban Development (HUD) might be able to help. HUD can provide you with information and guidance on how to avoid foreclosure and offer you assistance. Head on over to this link and use the search tool to find free counseling and foreclosure prevention services. HUD also offers more direct assistance by helping you “modify” your loan to make it more affordable. Also, because the COVID-19 pandemic has been legally declared a “disaster,” you can seek out disaster relief assistance here.
Alternatively, you could seek out the assistance of a non-profit. There are nonprofit companies that may be able to help you with a “refinance.” This is when you’re given a new loan to pay off your existing one. This could help you by making your payments more affordable, helping you pay off all of the past dues, and letting you take a little bit of extra cash out against your home’s equity so you can pay for other things. One company that may be able to help you is “Nonprofit Mortgage Company,” but there are more out there that you should look for.
There are also nonprofits that will provide you with payment relief by simply giving you money to use towards your mortgage payments. Two examples of nonprofits that may be able to help you are the Saint Vincent de Paul Society and the Salvation Army. Both can also help you with finding employment.
Also, reach out to your local or state governments for additional resources and assistance. If you live in California, for example, the state offered $2 billion to help people with up to $3000 a month towards mortgages or even a lump sum of $25,000 if you’re in the final stages of foreclosure. Unfortunately, that program has ended, but keep an eye out for future funding and programs by clicking here. Other states might still be offering assistance so be sure to look for those resources. Also, reach out to your local city council and ask whether they are currently offering any financial assistance for homeowners experiencing financial hardship.
What About Bankruptcy?
Bankruptcy should be considered a “last resort” option. However, chapter 7 or 11 bankruptcy could help you keep your home. If you are out of options, and you’ve tried everything else I’ve mentioned here, reach out to a local lawyer for assistance and questions.
What should you do while you’re on forbearance?
Remember, being on a forbearance does not mean your payments are forgiven. A forbearance without a plan is like a bandaid on an infected wound; it’ll help in the short term but eventually, you’ll lose a limb if you ignore the root of the problem.
While on forbearance, the lender will encourage you to make partial payments. If you plan on being able to financially recover soon then this is a good idea; it’ll make your situation more manageable once you’re ready to start making payments again. However, if you’re uncertain about your future, it would be wise to save whatever money you earn in a savings account until things become a little more clear for you. Do not spend money that you’ve set aside in your savings account for future mortgage payments on things that aren’t your mortgage.
If you’ve lost your job, use this time to look for a new one. If you’re in an industry that’s unlikely to recover anytime soon, consider making a switch to one that will. Applying to one job a day will not be enough in this economic climate. Finding a new job will be a job unto itself. Spend at least half of your time tailoring your resume to the jobs you’re applying to. Don’t be afraid to take a pay cut, even if it’s a significant one. Your goal is to generate just enough money to pay down your mortgage, for now. Later, once the economy recovers, you will have an opportunity to seek out a better paying job in an industry you’d prefer.
The last thing you want to do is nothing. Now is not the time to roll over and fall into a depressed state. Move. Your home depends on it.
Unorthodox ways out of a forbearance
These “creative” options are not recommended for everyone. Try these only if you have a strong stomach. Only try these if you really must, if you can’t get any of the previously mentioned options.
If you know you’ll have your job back, and you know you can afford an extra payment alongside your mortgage, consider pulling out a non-collateralized loan at a reasonable interest rate. These are loans that cannot foreclose on your property or seize your assets if you can’t pay. This might be considered an option of last resort — instead of not being able to pay your mortgage and putting yourself in a position where you might have to sell your home and or be foreclosed on. Beware, getting into more debt might not be the best solution for you if you. Again, only take this option if you are confident that you’ll be able to get back on track with your mortgage and make regular payments on the new loan.
If you aren’t so sure how you’re going to make it out of your situation, the trick might be to get on a forbearance just to “live to fight another day.” Continue extending your forbearance as long as you can until you can figure something out. While you’re on forbearance, you can rent out a room, or rooms, using Airbnb or craigslist. Look for alternative ways to generate a bit of cash. Drive for Uber eats, or DoorDash, for example. Sell your old stuff on eBay or OfferUp. Save up the money you earn from renters and side gigs to pay down your missed payments at the end of forbearance.
If, at the end of your forbearance, you cannot pay down the past due, ask for a repayment plan. Use the money you’ve saved up to pay down the past due in payments and continue making your regular monthly payments (hopefully, you’ve gotten your job or business back by then).
What’s your best option?
Remember, your first step is to get as much clarity as possible as to what options your loan investor and servicer will provide you with.
If you know you’ll be given a deferral, and you believe you’ll be able to start making regular payments on your mortgage soon, then this might be the best option for you. Use your time while you’re on forbearance to save up. In my opinion, you should not pay down a past due balance if you are planning on following through with a deferral. Save the money you earn in a savings account in case you run into problems in the future.
If you know you won’t be given a deferral, or you’re unsure, plan on either paying back the full past due or asking for a repayment plan. This might not be easy, but it’ll be your best and the surest way out of this.
Lastly, a loan modification is an option for you if you know you won’t be able to pay back the past due and your income is so reduced that you won’t even be able to pay your regular monthly payment. This option is not guaranteed. A bank needs to approve you for a loan modification. Also, a loan modification is based on what you’re able to pay. Make sure that when you’re reporting your income and expenses to the bank, you make room for a mortgage payment. I’m not telling you to lie about your budget. What I am telling you is that if you report not being able to afford a mortgage payment then you will probably not be approved for a loan modification.
Whatever option you choose to take, make sure you have backup plans. Know your rights and get everything in writing as much as possible. Never assume! Ask questions, do your research, and don’t take anyone’s word as truth. A lot of the people who are answering the bank’s phone number right now are new employees or contractors who may not know very much about your options, may not tell you the whole truth, or maybe even give you false information. You will make it out of this but you must be proactive and knowledgeable or have access to people who can help you.
Reach out to me with any questions or comments here.