Homeowners who fall behind on their monthly mortgage payments have various options to catch up and avoid foreclosure. Speaking to their loan service provider as soon as possible is key, and it can give them a clear understanding of several payment alternatives.
First, homeowners might be able to put their mortgage on a temporary hold called forbearance. During the set forbearance period, mortgage payments are suspended, with the homeowner responsible for paying a lump sum or resuming monthly payments once the period runs out. Homeowners are not considered delinquent on their mortgage during this period.
Forbearance works best for homeowners experiencing temporary financial hardship, for example, during an employment gap. The process is fairly simply for service providers, and the main drawback is that it extends the length of the mortgage, requiring borrowers to pay back more money due to the increased interest.
Loan modification is another option for borrowers who are having trouble making payments. Similar to a refinancing, loan modification involves revisiting the terms of the loan to establish lower interest rates or a longer term. This leaves borrowers with a more manageable monthly payment, helping them avoid delinquency.
To secure a loan modification, borrowers must demonstrate their financial hardship and their ability to pay the new amount. Because service providers already have the borrower’s documents, the process usually proceeds quickly.
A homeowner can remedy delinquent mortgage payments when their financial situation improves by creating a repayment plan. Upon a service provider’s approval, borrowers can establish a repayment plan that requires a lump sum payment to bring the account to good standing, or one that adds additional funds to the regular payment amount. The latter option requires the homeowner to convince the lender they will be able to maintain the higher payment.
Homeowners can request a deed in lieu of foreclosure, an arrangement whereby homeowners voluntarily turn home ownership over to the lender to avoid foreclosure. This protects the homeowner from personal liability for the mortgage balance. Unlike a foreclosure, which appears on a credit report and makes future borrowing difficult, a deed in lieu of foreclosure does not affect credit.
Another option for homeowners experiencing financial hardship may be reducing home ownership costs. Shopping for lower property insurance or researching property tax abatements can both help a homeowner save money on their monthly payment. Further, some homeowners with sufficient equity in the home may be eligible to eliminate their private mortgage insurance (PMI).
In some cases, homeowners must sell their home to avoid foreclosure. A short sale involves selling the home for less than the amount still owed on a mortgage. If the loan service provider approves a short sale, the homeowner may sell the home and use the proceeds to pay off the mortgage, although in some cases the sale amount will not cover the mortgage balance. In this case, the laws covering who is responsible for the difference between what is owed and the amount received from the sale vary from state to state.
Some states require the seller to pay the difference between the sale amount and the mortgage amount. In these cases, homeowners should ask the lender to waive this requirement before engaging in a short sale. If forced to take this approach, it's recommended to consult with a U.S. Department of Housing and Urban Development (HUD) counselor to best negotiate the process.
Homeowners at risk of foreclosure should always research local resources. For example, Philadelphia’s Residential Foreclosure Prevention Program operates an educational hotline where homeowners can receive housing counseling and legal assistance, while the Sustaining Urban Neighborhoods program in Boston purchases foreclosed properties before the owners are evicted. The organization then allows the former owner to repurchase the home at an affordable price.
