Defaulting on your mortgage is not the same as not being able to pay rent. If you miss your rental payment, you can easily talk to the landlord for an extension. If you really can no longer pay, worse scenario is you pack your things and look for another property to rent that is well within your budget. Not being able to pay your mortgage is much more complicated than that. You will not only be putting your property in jeopardy but also your credit score or standing with the bank (or any other financial institution). Thus, as much as possible refrain from defaulting on your mortgage. So, what to do if you can’t pay your mortgage?
Why Your Credit Score Matters
Before we go into that, it is important to understand first why your credit score matters. Your credit score is a rating of your creditworthiness. It indicates whether you are trustworthy enough for the financial institution to pay your debts. It is important because it is a deciding factor each time you borrow money from a bank. The amount of money that you can borrow including the interest rates are affected by your credit score. And the credit score does not only apply to real estate loans but covers all other forms of loans such auto loans, student loans, personal and even credit card loans. Thus, it is important that you take care of your credit reputation by paying your dues on time.
What To Do If Your Capacity to Pay Has Diminished
So what if you are put in a situation wherein you can no longer afford to fulfill your obligation? The first thing that you need to do is to get in touch with the bank long before the due date. Although lenders normally have a grace period for late payments, it is best to get in touch with them before they charge the late payment fee. For record purposes, it is best to put your concern in writing. Indicate your loan reference number. State your reasons or difficulties. And ask them what your options are. There might be programs available to help you.
If your capacity to pay has been diminished, options normally include the following:
1.Forbearance Plan
With this option, the lending institution will agree to temporarily suspend or reduce your monthly mortgage for a brief period of time. It will give you a short term relief to your financial woes until you recover. But once the forbearance period is over, there should be an agreement on how you are going to repay the suspended dues.
2. Debt Restructuring Plan
In a debt restructuring plan, the terms of your loan will be modified. The monthly payments will be lowered but the term will be extended. The purpose is to make your mortgage more affordable.
What To Do If You Already Missed Payments
3. Repayment Plan
A repayment plan is designed to help you pay back your missed payments. In a repayment plan, the lender normally spreads your overdue amount in a specified period of time. The amount is then added to your monthly payment until the overdue amounts are repaid; thereby increasing your monthly payment. Once the said period is over, your monthly payment will then revert back to normal.
What To Do If You Can No Longer Afford to Continue with the Mortgage
5. Short Sale
A short sale is a sale of an asset that a seller does not own. If a property is mortgaged, technically, the seller does not own the property yet. In a short sale, the lender sells the property below the mortgage value. It can forestall the foreclosure but the lender loses all profit from the said property. But the good thing about it is that it does less damage to your credit score than a foreclosure.
6. Voluntary Foreclosure
Voluntary foreclosure is done in the event that you can no longer afford to continue with your mortgage. A voluntary foreclosure is initiated by the borrower who can no longer continue with the monthly payments. It is done to prevent involuntary foreclosure. A deed in lieu of foreclosure is an example of a voluntary foreclosure. It can release you of your obligations. A deed in lieu of foreclosure is an agreement where you surrender the deed to your property to your lender. Although you will lose your property, you can avoid a foreclosure report on your credit rating. Although a voluntary foreclosure is harmful to your credit rating, it is not as harmful as involuntary or forced foreclosure.
Feature Photo by Karolina Grabowska from Pexels
