If homeownership is the American Dream, then foreclosure is the national nightmare.
Though the nation’s foreclosure rate dropped dramatically after the Great Recession of 2008, the COVID-19 pandemic reminded consumers what happens to people who lose jobs, see work hours reduced or suffer health problems that make it impossible to meet once affordable monthly payments.
Foreclosure became a hot topic when the COVID-19 pandemic struck and 59,984 homes were hit with foreclosure filings in Q1 of 2020. That number dropped to 33,699 in Q1 of 2021, but only because of the federal moratorium on government-backed loans.
That downward trend continued through 2021, which saw the fewest foreclosure filings in the 16 years that statistic has been kept. The 151,153 filings were down a whopping 29% from 2020.
Many of those federal COVID-19 relief measures have expired since then. Because of that, and because of high inflation and record-high gas prices, there is a chance foreclosure numbers will spike in 2022.
The Consumer Financial Protection Bureau produced a report in March of 2021 that said 2.1 million families were three months or more behind in mortgage payments. The government’s ban on mortgage foreclosure ended July 31, 2021, leaving millions in danger having their homes foreclosed.
There are some escape routes for those facing foreclosure, but it will require equal parts assistance from government programs; flexibility on rates and payments from lenders and a willingness by homeowners to do the hard work necessary to ride out a very unsteady situation.
Homeowner Assistance for Victims of COVID-19
The federal government offered the first bit of foreclosure help through Fannie Mae and Freddie Mac, the government lending agencies that back 29 million homeowner mortgages.
Fannie Mae and Freddie Mac said eligible homeowners – those who have lost income because of COVID-19 and hold loans backed by the Department of Housing and Urban Development, the Department of Veterans Affairs and the Federal Housing Finance Agency – could have mortgage payments suspended or reduced for up to 12 months, but that ended July 31, 2021.
The private lending industry, which includes banks, finance companies, servicers and mortgage investors, followed suit. It said it would suspend payments if the coronavirus has reduced a homeowner’s income, made them ill or kept them from working. Many banks put a hard 12-month deadline on that policy, while some extended it to 18 months.
If you owe several months of payments, it would be best to contact your lender and see what COVID-19 related financial assistance is still available.
What Happens If You Can’t Pay Your Mortgage?
If you own your home, it is more than shelter. It is probably your biggest financial asset. It’s also likely a mortgage is your biggest debt. Losing an investment that took years to build could turn out to be the biggest financial mistake of your life.
Worse still, allowing your home to go into foreclosure will devastate your credit rating. It will impede your ability to borrow and leave a black mark on your credit history that could take years to erase. It’s imperative to consider every option to keep the mortgage payments flowing.
Fortunately, you can prevent foreclosure, but you must take the initiative. Lenders know there are many reasons why borrowers can’t pay their mortgages:
- Job loss
- Illness or injury that prevent you from working
- Death of a spouse
- Divorce or separation
- Medical debt
Though lenders insist that you make payments, they are often willing to make accommodations.
You should consider contacting a nonprofit credit counseling agency for information about dealing with mortgage and other debt.
If you completely stop paying your mortgage what happens is certain: You will lose your home.
But there are ways to reduce payments in emergencies, and your lender probably will be ready to discuss them with you. It’s important that you provide evidence of your ability to resume making payments after a short-term crisis has passed.
If you lack a plan, or your income has fallen below what is needed to pay your mortgage long term, it is less likely a lender will offer mortgage relief.
What to Do If You Can’t Pay Your Mortgage
The first thing to do if you can’t pay your mortgage is probably the last thing you want to do: Let your mortgage lender know the situation, whether it’s loss of income, divorce, a health emergency or other changes in your circumstances.
It is best to stay ahead of the changing situation with your lender, who can be your best resource and ally in a crisis. Explain the circumstances, the steps you’re taking to restore your financial status, and your intent to come through the crisis and resume monthly mortgage payments.
One of those steps is the next call you should make, to a Housing and Urban Development (HUD)-approved housing counselor. This is easier than it sounds, as the Consumer Financial Protection Bureau provides an online “Find a Counselor” tool.
You can prepare for that process by learning about the kinds of options a counselor will discuss:
- Mortgage Loan Modifications
- Mortgage Forbearance
- Short Sale
- Mortgage Principal Reduction
- Short Pay Refinancing
- Deed In Lieu of Foreclosure
- Property Tax Payments
- Renting Your Home
- Government Programs
- FHA Loans
- VA Loans
- USDA Loans
Mortgage Loan Modifications
You need to contact your lender right away and honestly explain why you can’t keep up with your payments. Remember that your lender is your partner in homeownership. Though your name is on the deed, the lender probably provided most of the money you needed to buy your home and can take it from you if you fail to live up to your end of the deal.
Home loan modifications are one way to avoid foreclosure. Modifications are especially valuable for those who can refinance due to a change in financial status. A modification adjusts the terms of your mortgage to make it easier to repay, at least in the short term.
There are different modification approaches, including reduced interest rates, a longer repayment period, lowering the remaining principal owed or a plan that adds missed loan payments to the balance owed. Your lender will tell you what options are available. You should also review modification strategies so you’re prepared to discuss the alternatives and know which one might work best for you.
Veterans who can certify that they currently live in or did live in a home backed by a VA loan, are eligible for an interest rate reduction refinance loan (IRRRL). Under this program, veterans would replace their current loan with a new one, under different terms. An IRRRL loan could mean a lower interest rate and a fixed monthly payment in place of a variable rate loan.
Mortgage forbearance is when the lender allows you to reduce or pause monthly payments. It is the option millions of families took when the COVID-19 pandemic hit.
If you haven’t already taken advantage of this option, the choice is available, but it comes with many strings attached, most notably that you must repay any missed or reduced payments at some point in the future. So, for example, if you miss six months of $1,000 per month payments, you still will owe the lender $6,000 when the forbearance is up.
If you took advantage of mortgage forbearance during the COVID-19 crisis and skipped the full 12-month allotment, you owe 12 times whatever your monthly payment is. The very slight bit of good news is that the federal government has ruled that you do not have to repay the missed months in a lump sum. You should call your lender to see what terms they are offering.
How to Request a Mortgage Forbearance
While it may sound forbidding, a forbearance is fairly simple to request. You make the request directly from your loan servicer, which owns your mortgage and is legally obligated to inform you of their identity.
That request can be made by mail or over the phone. It is up to the servicer to decide whether to grant a forbearance, but remember, it is in their interest to help you return to paying your loan. Under the 2021 CARES Act, you can request a forbearance of up to 360 days, and you cannot be foreclosed upon while under forbearance.
A short sale is when someone sells their house for less than what they owe on it. The money from the sale goes to the lender, who can either forgive the balance owed or ask for a deficiency judgment against the borrower that would require the borrower to pay off whatever amount is still owed.
A short sale is a viable choice for homeowners who know they can’t keep up with the monthly payments and just want to get out from under that debt before the lender forecloses on the property.
Mortgage Principal Reduction
A lender can offer a mortgage principal reduction to the borrower, which reduces the amount owed and/or lowers the interest rate on the loan to an affordable level. The end result is the borrower can stay in the home and avoid foreclosure.
This was a very popular solution to the home financing problems that resulted from the real estate crash in 2008. The federal government created the Home Affordable Modification Program (HAMP) that helped financially distressed homeowners stay in their homes at payments they could afford.
The government still assists distressed borrowers through its Making Home Affordable program.
Short Pay Refinancing
Short pay refinancing is another option lenders can offer which will pay off your existing mortgage, then give you a new mortgage at a reduced balance.
This helps both parties avoid foreclosure. The bank loses less money than it would by foreclosing and the homeowner retains control of the property with payments they can afford.
This program is best suited for borrowers who have a good income, but have seen their property value take a dive, for whatever reason.
Deed in Lieu of Foreclosure
The deed in lieu of foreclosure means you turn the property deed over to the lender in return for no longer being responsible for the mortgage.
It also means the lender won’t foreclose on the property, which is a very damaging bit of information to have on your credit report. The deed in lieu of foreclosure will appear on your credit report, but packs far less impact.
Thus, a deed in lieu of foreclosure can be a double win for distressed homeowners, if they can get the lender to agree to settle things this way. The lender is not obligated to do this and may reject the idea if the property value has sunk dramatically, the house is in bad shape or there are liens against your property.
Property Tax Payments
Anyone who has owned a home recognizes property tax payments as the monthly fee paid to local governments to support services like police, firefighters, schools, etc.
The property tax is based on the assessed value of your home. It seldom is a factor in foreclosure, but if you’re only a few hundred dollars away from being able to afford your mortgage – and property values have gone down all around you – this may be a place to look.
You can ask the local tax collector to re-assess the value of your property. If it gets lowered, your tax bill goes down with it. That may produce enough money to get you over the hump and avoid foreclosure.
It is a longshot, for sure, but worth a try if things are tight.
Renting Your Home
This is an intriguing but problematic suggestion. Ultimately, moving out of your house and collecting rent requires a balancing act. The rent collected must exceed your monthly mortgage payment, and you also must move to a place where you can live rent-free or very cheaply.
Renting also means you become a landlord and that means new responsibilities and expenses. You will be:
- Responsible for increased income tax
- Responsible for maintenance and repairs
- Responsible for repaying missed mortgage payments
On the plus side, apps like AirBnB and VRBO make it easier for potential renters to find you and for money to be exchanged seamlessly.
When you file for bankruptcy (either Chapter 7 or Chapter 13), the court issues an automatic stay, which prevents creditors, including mortgage lenders, from attempting to collect the debt.
The automatic stay remains in place until the bankruptcy case is settled.
For Chapter 7 bankruptcy filings, that usually means 3-5 months, during which you have a chance to come up with the money needed to avoid foreclosure. If it’s a Chapter 13 bankruptcy filing, it could delay foreclosure for as long as 3-5 years, but only if you stay current on mortgage payments.
Government Programs to Help with Mortgage Payments
Although the federal government still provides some help to homeowners struggling to make mortgage payments, key mortgage relief programs launched during the housing market meltdown a decade ago have expired.
For information on help that might be available contact a federal Housing and Urban Development office in your area, visit the agency’s website or contact a state social services office. HUD and other agencies offer mortgage payment grants to homeowners with hardships.
The Federal Housing Administration is a major player in all facets of home ownership and mortgage lending. Up to 20% of mortgages nationally are FHA loans.
FHA loans are eligible for programs not included in the 2021 CARES Act. No lump-sum repayment is required after your loan has been in forbearance. And your loan may be eligible for a “standalone partial claim” – essentially a zero-interest second mortgage that is paid after your original mortgage is paid off
Veterans Administration loans are really guarantees behind loans obtained from lenders such as banks and credit unions. A VA loan doesn’t require down payments or mortgage insurance for qualifying veterans.
The VA also provides counseling and separate programs to help if you fall behind on your monthly payments.
The US Department of Agriculture guarantees loans in much the same way as the VA does. USDA programs are very much in line with the 2021 CARES Act, which was designed to help homeowners cope with the financial impacts of COVID-19.
Homeowners behind on their mortgage payments can apply for a 180-day forbearance plus a 180-day extension, if necessary. At the end of the forbearance, the lender must offer a written repayment plan.
Charities That Help with Mortgage Payments
Some charities help with mortgage payments. Each has its own eligibility requirements, so you need to discuss your situation with the charity to learn if you qualify for assistance. In some instances, the charities refer you to other organizations that might be able to help.
Here are a few groups to consider:
- The United Way: United Way has local chapters throughout the country that offer advice and sometimes emergency financial assistance. You can reach the agency’s hotline by dialing 2-1-1. In addition to housing help, the agency provides aid finding food, employment and healthcare.
- Catholic Charities: Though part of the Catholic Church, this agency assists people of all religions, races and backgrounds. Catholic Charities offers emergency financial aid and a counseling program to help homeowners find long-term remedies for their financial problems.
- Salvation Army: The Salvation Army has a storied history of providing aid to the needy. In some instances, it offers emergency rent and mortgage aid. Homeowners need to show that they have received a foreclosure notice from their mortgage lender and demonstrate that they will have enough income to resume repaying their mortgage after the crisis passes.
- St. Vincent de Paul Society: This is a ministry in some Catholic churches. SVDP provides emergency assistance to those coping with a crisis. This can include mortgage aid, help locating employment and transportation assistance.
- Local Charities: An assortment of church groups offer aid. If you are a member of a congregation, ask what might be available. Also consider community action agencies, an assortment of groups throughout the country that work with government programs and charities to help the needy.
- Family and friends: This can be tricky and should be a last resort. Family and friends probably would provide the best terms and payoff rate, but if things go sour, it usually is the end of the friendship or a real burden on the family. If you go this route, draw up a loan agreement and stick with it.
Keep in mind that many charities have limited money to help. As housing prices have increased in recent years, so have monthly mortgage payments. If you have a large monthly payment, you might find it difficult to find an agency with the funds to help.
Mortgage Help If You Are Unemployed
The Home Affordable Unemployment Program (HAUP) was created by the federal government to help homeowners who have lost their job
HAUP offers banks and mortgage companies incentives to modify home loans and offer up to 12 months of forbearance to homeowners who are unemployed and receiving unemployment checks.
Homeowners must be 90 days delinquent on mortgage payments and in danger of defaulting on their loans. The home must be their primary residence, they must owe less than $729,750 on it and not have benefited from previous help in the HAUP program.
Contact your mortgage provider to find out if they participate in the program.
Is Selling Your Home an Option?
If you have enough equity in your home – and the real estate market is as hot as it has been the past few years – selling your home might be the best way to avoid foreclosure.
Homeowners who have seen the value of their home rise – the average home value went up an incredible 24% in 2021 – but don’t have the income to make monthly mortgage payments, should consider selling.
Check with local real estate agents to gauge the resale value of your home and whether selling your home will cover what’s left of your mortgage and taxes.
If your home already is in foreclosure, make sure you advise the lender that you intend to sell and pay off the mortgage. Ask them to postpone the auction date so you have time to sell on your own.
Selling and downsizing would relieve the pressure of foreclosure and help you avoid the negative impact it would have on your credit score.
Avoid Foreclosure Scams
Con artists are an imaginative group who are constantly looking for ways to trick people out of their money. They especially like to target people with financial difficulties who might not be thinking as clearly as they ought to be. To avoid being taken in by a foreclosure relief scam, don’t trust callers who offer deals that seem too good to be true or offer to cure your mortgage problems for a fee.
To avoid mortgage scams, become familiar with tactics the scammers use. HUD operates a program in conjunction with several other groups to help homeowners identify scams and report them. For information, call NeighborWorks America at (888) 995-HOPE (4673) at any time.
Some mortgage scams seem so obvious that you might wonder who could fall for them, but people in distressed situations are sometimes extremely gullible. If someone says they will handle your mortgage problems for a fee, or claims to represent a mortgage prevention expert who will talk to you for a fee, beware.
Other pitches to view suspiciously include an unsolicited call from someone who claims to represent your mortgage lender and starts asking you for sensitive financial information, or someone without credentials who offers to help you get back on track if you sign over your deed.
Always ask for credentials and investigate. If you are sure you’re dealing with a fraudster, call NeighborWorks or a law enforcement agency.
In stressful times – and facing possible foreclosure certainly qualifies – it is most important to beware of those who try to take advantage of people.
Housing discrimination is illegal under federal law. Lenders and loan servicers can’t discriminate against borrowers, including when borrowers are in a difficult situation.
If your have faced discrimination when dealing with possible foreclosure, or any time, you should file a fair housing complaint through the Department of Housing and Urban Development or the Consumer Financial Protection Bureau.
This is important to protect yourself, and also to discourage discrimination against others.
Get Professional Help Exploring Options
Foreclosure is a stress-filled situation no homeowner wants any part of, but unexpected financial setbacks happen and it helps to know where to go for assistance.
Fortunately, there are many professional resources available for homeowners who find themselves in need of assistance. They include:
Public Housing Counselors provided by the US Department of Housing and Urban Development are equipped to assist with all housing-related situations, from buying a home, to renting, to foreclosure.
Lawyers can handle issues related to a foreclosure proceeding, but there will be fees involved.
Credit Counseling can be provided by nonprofit credit counselors, who are trained to help navigate situations involving credit card debt, medical debt and also homeownership.
The first stop always should be your lender. They don’t want to foreclose on you. It costs them far more to foreclose a home than to work with the consumer on finding an affordable mortgage payment. Ask them for assistance and you will be surprised at how willing they are to keep you in the home.
If that doesn’t work, research the many programs offered by the Department of Housing and Urban Development, the federal agency that oversees housing issues in the United States.
Beyond that, consider a HUD-approved nonprofit credit counseling agency as another source of help for mortgage and housing counseling. They can look at your income and expenses and offer suggestions that could create enough room in your budget to make payments on your mortgage.
In short, there are ways to deal with foreclosure.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
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