At some point, you may find yourself unable to afford your mortgage payments. It may happen all at once, after you lose your primary source of income. Or it may come gradually, as you struggle to stay afloat for months and eventually run out of savings.
Whatever the circumstances, there’s a clear set of steps you should take to resolve the situation.
One of your first options should be home loan refinancing. The basic idea here is to replace your old home loan with a new one. Depending on the circumstances, you may be able to extend the length of the term, you could end up with a lower interest rate, or you could switch to a fixed interest rate instead of a variable one. If you’re able to capitalize on multiple factors here, you may be able to reduce your monthly payments significantly—enough to bring your mortgage payments back within your budget.
This is an advantageous option because it allows you to keep your current house with minimal changes to your other finances. However, you may or may not be eligible for home loan refinancing, depending on how much equity you have, how much you owe, and when you started your mortgage.
Set Up a Forbearance or a Repayment Plan
If you know that your financial troubles are temporary, you may be able to set up a forbearance. A forbearance allows you to temporarily limit or reduce your mortgage payments. Later, you’ll make up the difference by paying more each month, so this isn’t a great long-term option if you don’t see a path for your financial situation to improve. For example, if you currently pay $1,000 per month, you may temporarily reduce your payments to $800 for 6 months, then pay $1,200 per month for 6 months.
Similarly, if you’ve already missed a few payments, you could work with your lender to establish a repayment plan. This will help you catch up on your mortgage payments in a way that’s both reasonable to the bank and financially approachable for you. But again, this is a short-term fix.
Rent a Room
If you’re struggling to make ends meet but your home is in good shape, you could consider renting out a room, or even renting your home to another tenant altogether. In either case, you’ll be able to collect a substantial sum of money from your tenant, and use that toward your mortgage payment, offsetting the total costs to you. Depending on how close you are to being able to afford this house, this could help you close the gap.
Sell the Home
If mortgage payments are just too high, your best option may be to sell the house and purchase a new house in a more affordable area. However, this is only a realistic option if you have enough equity to make the deal. If you’re underwater on the mortgage—in other words, if you owe more money than the home is worth—this may not be a viable option. Otherwise, you should be able to put yourself in a much more financially favorable situation. The downside, of course, is that you’ll lose this house in the process. But it’s better than some of the alternatives.
If you miss enough payments, the bank will foreclose on your home. The foreclosure process is different for each state, but the basics are always the same; the bank will reclaim your home as a way to recoup its losses on the mortgage. You’ll lose your home and take a massive credit hit. You’ll want to avoid this option if at all possible.
One last-ditch alternative is to pursue a deed-in-lieu of mortgage, in which you’ll hand over the deed of your home voluntarily. This isn’t a great option for your credit and you’ll still lose your house, but it’s simpler and less painful than a foreclosure.
Rebuild an Emergency Fund
Whatever method you choose to get over this financial hurdle, take the time to put together a plan to build up an emergency fund—an extra pocket of money you can use to get through a tough financial situation. To do this, you’ll need to reduce your expenses to below your earnings and set aside the extra money until you have several months of living expenses set aside. This can help you get through almost any emergency without having to think about options like refinancing or foreclosure.
Many homeowners eventually find themselves in a position where mortgage payments are no longer tenable, either temporarily or for the foreseeable future. But if you find yourself here, you should know you have several practical options for how to move forward.