When You're Behind on Mortgage Payments, Consider These Options

"Due to a job loss and some unexpected medical bills, I am behind on my mortgage payments by several months. What are my options at this point? Will the bank simply foreclose on my home, or do I have some way to get caught back up?"

Sadly, this is one of the most common questions we receive from home buyers these days. And there's no mystery why. Millions of Americans have fallen behind on their mortgage payments, largely as a result of the economic recession we are grappling with. The two biggest reasons for this problem are actually listed in the sample question above -- job loss and medical bills. These are common themes in the emails we receive from readers.

Regardless of the reasons why you are behind on your mortgage payments, the important thing is that you understand your options going forward. I'll talk about those options in just a moment. First, I want to talk about the process that takes place when a homeowner defaults on a mortgage loan. After all, you have to understand the foreclosure process in order to avoid it, right?

What Happens When You Fall Behind on Payments

Let's say I own a home, and I've been making regular mortgage payments for the last few years. But then I lose my job and suffer some other financial hardships. As a result of this, I'm no longer able to make my payments on time. Usually, the first thing that happens is that the lender will send me a letter to inform me of my delinquency. It's probably something I'm already aware of, but it's a formality that almost always takes place. So the lender sends a letter that says something like: "You have missed a loan payment in the amount of $1000. Please contact us so we may resolve this issue. Failure to make your mortgage payments in full could result in foreclosure."

The most important thing to know at this stage of the game is that the lender wants to avoid foreclosure as much as I do. The process can be very expensive for the lender, not to mention all the hassle that's involved. It doesn't do them any good to have a non-performing loan on their books, which is the terminology used to describe a homeowner who is not paying his or her mortgage.

So what should I do at this point? I should do what the letter says and contact my lender. If at all possible, they want me to stay in the home and to continue making my payments going forward. It's the path of least resistance. Of course, if I can't do that, they won't hesitate to foreclose on the home down the road. But their first priority is to keep that loan on the books, and to keep it current. This minimizes the work they have to do, while ensuring they get paid at the same time.

If I don't contact the lender and work out some kind of solution, and instead choose to ignore the problem, then I'll probably get a follow-up letter within a few weeks. This letter will be a notice of foreclosure action (the first one was a notice of default). Essentially, this is when the lender says: "The mortgage loan is still in default, so as a result of that we are initiating foreclosure actions. We are currently scheduled to foreclose on your home on whatever date, at which time you must have vacated the premises." In other words, we are repossesing the home, so pack your bags. A sheriff's deputy or other county official may even post this notice on the window of my home.

But this can all be avoided! Even though I am behind on my mortgage payments, there are certain things I can do to avoid the foreclosure process entirely. More than anything, it comes down to a question of financial stability. Are my financial problems short-term in nature? Or, are they more permanent? In other words, is it possible for me to catch up on my mortgage payments, or is the loan simply unaffordable for me? Once I've answered this question, I'll know which direction to move in. So let's talk about the difference between these two scenarios.

Getting Caught up on the Mortgage

I began the foreclosure scenario above by saying that I lost my job. Let's assume now that I found another job, and I put my financial problems behind me. But I still have some missed mortgage payments that need to be addressed. What can I do in this situation?

The first step -- always the first step -- is for me to contact my lender and explain the situation. I would tell them that I'm ready to get back on track, and I'm looking for a way to get caught up on the missed payments. At this point, they would probably present me with one of several options. These are referred to as mortgage workout solutions, because they allow you to work yourself out of unpaid debts.

A repayment plan is one of the most common solutions offered by lenders. Basically, this is a way for me to make my normal mortgage payment each month, plus a little extra to make up for my missed payments from the past. For example, if my regular payment is $1000, I might add $200 on top of that for a certain period of time, in order to get caught up on missed payments. Basically, I am taking the amount owed for back payments and "sprinkling" it over my future payments -- at least until I am current on the loan.

There are other solutions that your lender may present to you, such as reinstatement and forbearance. In fact, these two strategies are often used together. You can think of reinstatement as a single lump-sum payment to get caught up on your missed mortgage payments from the past. Forbearance is when the lender temporarily reduces or postpones your payments, usually with the understanding that you will make a lump-sum payment to get caught back up.

But here again, the first step is to contact your lender and see what options are available to you. From what I've gathered, a lot of homeowners are afraid to contact their lenders. I don't understand why, because everyone has the same goals in this particular scenario -- to bring the loan current and to keep the homeowner in place. In situations like this, where the financial problems are only temporary, the lender will almost always work with you to resolve the issue. It's the most affordable thing for them to do, and it saves them a lot of paperwork and hassle. So contact your lender first. Explain that you've had some temporary financial setbacks, but you are now ready and willing to get caught up on your payments. Ask them if they can create a repayment plan for you, and there's a very good chance they will do it.

When You Cannot Afford the Payments Anymore

Everything we talked about in the previous section applies to temporary financial problems. The example I gave was that I lost my job, fell behind on my mortgage payments for a few months, but then got another job. It was a temporary glitch, so to speak. And after getting back on my feet, I would be able to get caught up on my payments and bring the loan current once more.

But what happens if you simply cannot afford the mortgage anymore? This is a common scenario for people who used no-interest loans, adjustable-rate mortgage loans, or some combination of the two. A lot of these folks saw their monthly mortgage payments increase significantly -- sometimes even doubling -- after the adjustment phase. As a result, they could no longer afford their mortgages. It wasn't a temporary problem. It was permanent.

Maybe this is what happened to you, or maybe there is some other reason why you can no longer afford the monthly payments. Regardless, you still have options to avoid foreclosure at this stage. In most cases, this will either mean selling the home or modifying the loan in some way.

  • Mortgage modifications have been in the news a lot lately. This is where the lender reshapes the loan in some way, to make it more affordable for the homeowner. Usually, the lender will modify the interest rate or the term of the loan, in order to reduce the size of the payments. Only in rare circumstances will they actually modify the principal amount that is owed. In some cases it's a permanent restructuring of the loan, and in other cases it's a temporary change. The goal here is to make the loan payments more affordable for the struggling homeowner.
  • Selling the home may also be an option when you are behind on mortgage payments and cannot get caught up. A lot of homeowners in the situation will use the short sale strategy, which means the lender allows them to sell the home for less than what they owe on the mortgage, in order to sell it quickly. The goal here, once again, is to avoid a long and drawn-out foreclosure process.
  • Refinancing can also be a solution in this kind of situation. But you need a certain amount of equity in order to refinance your home. If the mortgage is unaffordable for you because of the interest rate, you may be able to refinance into a lower rate and thereby reduce your monthly payments. You can learn more about this subject in the refinancing section of our website.

Those are some of the strategies you can use when you are behind in your payments and no longer able to afford them. Mortgage modifications and short sales are the two most common avenues in this particular scenario. Refinancing is less likely to work out, because you'll need to get caught up on your payments before you can refinance the loan. And even then, you might not get approved for a new loan with smaller payments. It's a case-by-case scenario.

Walking Away When You are Behind

There's one more thing we need to talk about, and I've put it at the bottom of this article because it's a last resort. Some people who fall behind on their mortgage payments simply end up walking away from the home. This happens most often in cities that were severely affected by the housing crash, because homeowners in these areas will never see their property values reach the levels they were at in the past.

For example, if I bought a home three years ago in San Diego for $500,000, that home may only be worth $340,000 in the current economy. And it probably won't ever reach the amount I paid for it, at least not in my lifetime. So I will never regain what I lost. If I'm behind on my payments (in addition to being trapped in a negative-equity situation), the idea of walking away might seem like a good one. The bank will foreclose on the home, and they will report the foreclosure to the credit-reporting agencies. Thus, my credit score will take a big hit, and the foreclosure will stay on my report for up to ten years.

I'm certainly not advocating this "strategy," but it is a rising trend in these troubled times, so I had to at least mention in this article. You can learn more about walking away from a mortgage in this article.

Where to Go For Help

I've thrown a lot of information at you with this article, so it may seem overwhelming at this point. If you would like to get one-on-one advice from a mortgage and housing expert, I recommend contacting a HUD-approved housing counselor. These people offer counseling that is either free or low-cost. You can find a counselor in your area by visiting the HUD website, or by calling (800) 569-4287.

I would also warn you against the various foreclosure prevention scams that are out there. A lot of companies make big promises to homeowners who are behind on their mortgage payments, but they usually don't deliver anything but heartache. And, of course, they end up taking your money in the process. You can learn more about these scams, and legitimate sources of foreclosure help, in this article.

Conclusion And Going Forward

So what did we learn from this lesson? What can you do if you're behind on your payments and fear that a foreclosure is imminent? As we talked about, the first thing you need to do is figure out your financial situation. Have you suffered a temporary setback that put you behind on your mortgage payments? Are you now able to resume making regular payments to get caught up? Or, has a permanent change in your financial status made the loan totally unaffordable? You need to start by answering this question, because it determines what options are available to you.

The next thing you need to do is talk to your lender. This is especially important if you think you're able to get caught back up on the payments. Call them and explain your situation, and see if they can offer a repayment plan, a reinstatement, or some other solution to get you back on track.

If your financial troubles are more permanent in nature, and you simply cannot afford to make your monthly mortgage payments anymore, then you have fewer options. In this scenario, you might want to talk to a real estate agent in your area who specializes in short sales. They might be able to help you sell the home to avoid foreclosure, albeit with your lender's approval.

You should also research mortgage modifications to see if you are eligible for one. This could make your payments more affordable and thus avoid foreclosure altogether.