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Loss Mitigation Explained: How to Catch Up if Your Mortgage Falls Behind

Mar 24 2020

Struggling with your mortgage? You may feel a little embarrassed (not to mention stressed) but there’s no need to be ashamed. Financial setbacks can happen to anyone for various reasons, including an 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 struggling with. 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.

Loss mitigation options, including forbearance, repayment plans and loan modifications, are put in place to help borrowers catch up on their mortgage payments or avoid falling behind in the first place.

Quick note: Throughout this post we’ll 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.

Planning to contact your loan servicer about your mortgage but not sure how to go about it? We explain the process in our post on managing your mortgage in a crisis. Nervous about doing it alone? Get free help from a housing counselor.

Wondering what your mitigation options are? We compiled a list below, but first:

Some Servicer Background

If you’re in hot water, the first thing to do is contact your loan servicer. 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 advice and even negotiate with your servicer on your behalf free of charge.

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.

Why do we say “servicer” instead of “lender”? In today’s market, it’s common for lenders to sell your loan rights to third-party servicers who then manage your loan payments.

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.

If you’re less than 60 days behind, you’ll likely speak to your servicer’s collections department. Somewhere between 60 and 90 days, you’ll probably be handed over to the loss mitigation department.

DIY catch-up

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.

Repayment plan

Under this method, 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 extra to bring their loan current. Under a formal repayment plan, your servicer will 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, 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.

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 will therefore cost you more in interest.

Forbearance

Another option for those who are experiencing financial hardship and are worried about their mortgage payments is forbearance. This reduces or suspends your mortgage payments, during which time the servicer agrees not to take foreclosure action. Forbearance typically lasts for 180 days, but some borrowers may qualify for an additional 180 days under the Coronavirus Aid, Relief, and Economic Security Act (aka the CARES Act).

Forbearance is most often given to homeowners with a history of on-time payments who can prove their difficulty is a short-term problem, like a temporary lapse in income due to something like a workplace injury, a reduction in income due to COVID-19 or job loss.

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 through one of the above loss mitigation options. Borrowers in forbearance with Fannie Mae- or Freddie Mac-backed mortgages will not be required to repay their missed payments in one lump sum at the end of a forbearance.

That being said, the road out of forbearance doesn’t look the same for everyone, it will depend on your unique situation and what your loan servicer is willing to offer. It’s a plan you will come up with together. Regardless, during COVID-19, borrowers must apply for loss mitigation with their loan servicer before their forbearance period ends to avoid negative reporting on their credit.

One more head’s up: When your mortgage payments resume, your interest rate should be the same as it was before the forbearance. If your interest rate is altered in any way after a forbearance, speak up and ask some questions.

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.

Have an FHA-backed loan? Our post on FHA forbearance options breaks down your specific options.

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