This is part of our ongoing series on mortgage relief options and how to handle your loan in a crisis.
Struggling with your mortgage? There’s no need to feel ashamed. Financial setbacks can happen to anyone for various reasons, including illness, the death of a loved one, or a crisis like a weather-related disaster.
Let us first say that we’re truly sorry for anything that you’re going through. We care deeply and are here to help during this tough time. On the bright side, just because you’re experiencing hardship doesn’t mean your house will immediately go into foreclosure. You have some time and a number of preventative steps to take.
Mortgage relief options (technically referred to as “loss mitigation”) such as forbearance, repayment plans, and loan modifications are available to help borrowers catch up on their mortgage payments or avoid falling further behind. Loan servicers will determine whether a borrower’s financial hardship is short- or long-term and will offer options accordingly.
Quick note: Throughout this post, we use the term “bring your mortgage current.” Put simply, this means paying any past-due amounts, including missed payments and fees that were charged (late fees, foreclosure fees) to make your mortgage up-to-date on payments.
We’ll explain your loss mitigation options below, but first:
Background on loan servicers
Why do we say “servicer” instead of “lender”? In today’s market, it’s common for lenders to sell the rights to collect and manage your loan payments to third-party servicers.
If you’re in hot water, the first thing to do is contact the loan servicer to whom you make your monthly payment. The contact info is on your statement and there will be trained specialists ready to talk to you.
While you’re at it, reach out to a HUD-certified housing counselor. They can give confidential expert advice and even help you work with your servicer for free. You can also find a housing counselor in your area through the Consumer Finance Protection Bureau.
A servicer will likely ask you to fill out a mortgage assistance application, which they’ll use to determine which assistance programs you may be eligible for.
Under federal law, lenders can’t start the foreclosure process until you’re more than 120 days late on your payments, and most mortgage servicers offer programs to help homeowners avoid foreclosure. At 90 days, many servicers stop accepting payments, but they’ll typically either help you establish a formal catch-up plan or give you a chance to pay the overdue amount in full.
Not sure how to go about contacting your loan servicer? We explain the process in our post on managing your mortgage in a crisis.
OK, now that we have that covered, here’s the tea on your loss mitigation options:
DIY catch-up
Are you fewer than 60 days behind? You might be able to simply pay extra whenever you can and gradually catch up. After 60 days, your servicer may insist on a formal plan.
Either way, you must communicate with your servicer. It’s important for them to know what’s going on and to have a record of your good-faith efforts.
Servicers will hold partial payments in a separate account, since they can’t apply a payment to your loan until they receive the full payment.
Note: Unless you’re on a formal repayment plan, the servicer will likely charge late fees until you make your loan current.
Additionally, some servicers won’t accept partial payments and will simply send the payments back to you, so it’s best to save up until you have enough money to make a full payment. Save a record of every payment you make and check your monthly statements to make sure they are properly credited to your account.
Forbearance
Anyone experiencing financial hardship and who is worried about their mortgage payments should consider inquiring about forbearance. This reduces or suspends your mortgage payments for a specific amount of time, during which the servicer agrees not to take foreclosure action.
Forbearance typically lasts for 30 to 180 days. Some borrowers may qualify for up to another 180 days under the Coronavirus Aid, Relief, and Economic Security (CARES) Act if they’re experiencing financial hardship due to COVID-19.
Update: The Federal Housing Finance Agency (FHFA) announced that borrowers who received COVID-19 forbearances before Feb. 28, 2021, for mortgages backed by Freddie Mae and Fannie Mac, may be eligible for three more months beyond their initial 12-month expiration.
Forbearance is most often offered to homeowners who make their payments on time but are now experiencing a short-term financial hardship, like a temporary lapse in income due to something like a workplace injury, illness, job loss, or a reduction in hours.
Keep in mind that the road out of forbearance doesn’t look the same for everyone. It depends on your situation and the options your loan servicer has available. You must contact your servicer to discuss your catch-up plan before your forbearance period ends to avoid a negative impact on your credit report.
When your regular payments resume after a forbearance, you’re responsible for bringing your mortgage current. You’ll need to do this through one of the below loss mitigation options, or a COVID-19 payment deferral, which tacks your missed payments onto the end of your loan.
Head’s up: Borrowers in forbearance with Fannie Mae- or Freddie Mac-backed mortgages will not be required to repay their missed payments in a lump sum at the end of a forbearance unless they’re financially able to.
When your mortgage payments resume, double-check that the payment amount and terms, including the interest rate, are correct. If anything doesn’t look right, call your servicer to ask questions.
Repayment plan
Under a repayment plan, you’ll continue making your regular monthly payment, plus an additional amount to catch up on what you owe. This can be a great option for someone who experienced a job loss, for example, but is now back to work and can afford to pay something extra each month to bring their loan current. Under a formal repayment plan, your servicer will typically waive late fees and agree not to proceed with foreclosure as long as you are making the agreed-upon payment.
Loan modification
In some cases, if you are experiencing a long-term financial hardship, a loan modification can help bring your loan current or adjust your payments to an amount you can afford. It’s a change to the original terms of your mortgage and may involve extending the number of years you’ll pay the loan, or adjusting the principal balance to include past-due payments and fees.
Other types of loan modifications are a lower interest rate or changing an adjustable interest rate to a fixed rate.
A loan modification lets you stay in your home and has less of an effect on your credit score than a foreclosure. However, an extension on the life of your loan means it’ll take more time to pay off and, as a result, cost you more in interest.
Phew! That was a lot to cover. We hope it helped! If you’re in need of more information, head to the Consumer Finance Protection Bureau’s guide to Coronavirus relief options and check out our post on tips to spot a mortgage relief scam.
For more info on your mortgage in a crisis, check out these posts:
- Have an FHA-backed loan? Our post on FHA forbearance options breaks down your specific options.
- Considering a forbearance? We explain whether a COVID-19 forbearance will impact your credit score.
