The possibility of losing your home because you can’t make your home loan payments can be terrifying. Perhaps you’re having trouble making ends meet because you or a family member lost a job, or you’re having other financial problems.
If you’re struggling to make your mortgage payments, there are several options to help keep you in your home, or at least limit the financial damage of giving it up. Here’s what to do if you can’t keep up on your home loan payments anymore.
Here’s what to do if you can’t keep up on your home loan payments anymore.
Contact Your Lender
You don’t need to wait until you’ve missed a payment or you’re sure you won’t be able to make one; call your lender if you are concerned about your ability to pay. In general, the earlier you ask for mortgage assistance, the more choices you’ll have. But to get advice specific to your mortgage, grab the phone.
Here’s what you should have ready when you call your lender:
- An estimate of your current income (and future income, if you anticipate that it may change).
- An estimate of your current expenses.
- Your most recent mortgage statement.
- Documentation of what caused your situation to change (usually referred to as “hardship”).
Can you defer your home loan repayments?
Most banks (including Westpac, Commonwealth Bank, NAB, ANZ etc. ) are giving home loan customers who have been impacted financially a repayment pause of up to six months. According to the latest figures from the Australian Banking Association, one in fourteen mortgage customers have already deferred their repayments due to COVID-19. Over 443,000 mortgages, worth more than $150 billion, have been deferred so far.
The Australian Banking Association has also announced that your credit score will not be impacted if you take a repayment pause.
If you’re considering this option, be aware that this could cost you in the long run.
1. When you defer, interest will continue to accrue
2. The typical repayment holiday is three months
3. Deferring a payment will result in higher total finance charges than if you made payments as originally planned
With a loan modification, you and your lender agree to new terms for your existing mortgage without refinancing.
This could include lowering the interest rate, lengthening the term, changing the type of loan or adding any delinquent payments to the amount you already owe.
With any of these modifications, the goal is to avoid foreclosure and, in most cases, make your monthly payment more affordable. A loan modification may hurt your credit score but not as badly as a foreclosure.
Refinance Your Home Loan
Refinancing a home can be an option, but only for buyers who aren’t already stretched to the max. For example, if you’re on track to pay off your mortgage in 10 years, you could extend the amortization of the loan, thus making the payments smaller.
Keep in mind, however, that refinancing often includes some pretty hefty fees (for breaking your existing mortgage contract), and may also cost you more in interest over time. For those who are already overextended on the loan, refinancing may not be an option at all.
Selling your home
Depending on the real estate market in your area, selling your home may provide the funds you need to pay off your current mortgage debt in full. Sometimes the best way to avoid foreclosure is to sell your home. The best way to do this is to list it the traditional way. Unfortunately, falling real estate values have taken that option away from many people whose mortgages are bigger than the market value of the property.
This is when the bank agrees to let a homeowner sell the home for less than they owe on the mortgage. The catch is that, as you can imagine, lenders aren’t thrilled about the idea of taking less than what’s owed to them, and it’s up to the lender to decide whether allowing a short sale is in their best interest
Deed in Lieu of Foreclosure:
In some cases, a lender will allow a struggling homeowner to sign their deed over to the bank instead of suffering a foreclosure. In this case, the borrower essentially turns the home over to the lender, who can then sell the home to recoup what they’re owed.
Bankruptcy is stigmatized. People often think that those who resort to bankruptcy just went out and blew tons of money on stupid stuff. Sometimes that is true, but people also file due to circumstances beyond their control like medical debt or a job loss. Whatever people might think, bankruptcy is an option when you can’t pay your mortgage.
When Is It Too Late?
Don’t wait until you’re receiving phone calls, or even a notice of foreclosure, before taking action. By then, formal processes may have started and be moving like a snowball gaining speed.
In general, lenders are willing to work with homeowners to resolve financial issues. They don’t want to go through the foreclosure process any more than you do. All lenders have their own rules about how they assist you.
The sooner you approach them about the problems you are facing, the more likely they can come up with a resolution that keeps you in your home. Communication is the key to a successful relationship with your lender, especially when you’re struggling to pay your mortgage.