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 the Coronavirus outbreak.
Let us first say that we’re truly sorry for whatever it is that you’re going through. We care deeply and are here to help you through 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”), including 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 amount, 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 that you make your monthly payment to. The contact info is on your monthly statement and they have 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.
A servicer will likely ask you to fill out a mortgage assistance application, which they’ll use to determine what 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.
Planning to contact your loan servicer about your mortgage but aren’t sure how to go about it? We explain the process in managing your mortgage in a crisis. Feeling alone? Get free help from a housing counselor.
OK, now that we’re caught up on all of that, here’s the tea on your loss mitigation options:
Are you less 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. Warning: Unless you’re on a formal repayment plan, the servicer will 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.
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 limited 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 an additional 180 days under the Coronavirus Aid, Relief, and Economic Security Act (aka the CARES Act), if they are experiencing financial hardship due to COVID-19.
Forbearance is most often offered to homeowners with a history of on-time payments who have 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.
In other words, it can be a great option and is easy to qualify for if you were up to date on your payments before COVID.
When your regular payments resume, 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.
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.
That being said, the road out of forbearance doesn’t look the same for everyone, it will depend on your unique situation and the options your loan servicer has available. It’s a plan you will come up with together. Regardless, during COVID-19, borrowers must contact their servicer to discuss loss mitigation before their forbearance period ends to avoid a negative impact on their credit report.
One more head’s up: 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.
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.
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 is 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 bring the loan current by including past-due payments and fees. Other types of loan modifications are the lowering of an interest rate and the changing of 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 you longer to pay it off and, as a result, will cost you more in interest.
Phew! That was a lot to cover and 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.