6 options when you can’t afford your mortgage anymore

Although today’s rate of foreclosure is a far cry from its September 2010 peak, the housing saga continues to unfold as unemployment and economic stagnation continue to leave many homeowners broke — and sometimes unable to make their mortgage payments. In fact, this past October, there were 41,000 completed foreclosures across the United States, according to CoreLogic.

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.

1. Contact Your Lender

A lot of people lose their homes to foreclosure out of sheer denial. Unfortunately, ignoring a foreclosure notice will not make the problem go away — the longer you wait, the more you reduce the options available. That’s why as soon as you run into trouble paying the mortgage, you should contact your lender to see if you can work something out.

According to the U.S. Consumer Financial Protection Bureau, you should be prepared to discuss why you can’t pay the mortgage, whether or not the situation is temporary and details about your income. For lenders, helping a borrower keep the home can be a best-case scenario, especially at a time when the market may already be flooded with other foreclosed properties. You can also contact the Consumer Financial Protection Bureau to talk to a housing counselor about your options.

2. Refinance

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 and might 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.

3. Apply for a Loan Modification

A loan modification is when a homeowner works with a lender to change the terms of the mortgage loan. This could mean a temporary or permanent change to the mortgage rate, term and/or monthly payment. This option is similar to refinancing, but it’s only open to those who can prove they’re facing great financial hardship — and who are willing to advocate for themselves to a lender that is probably receiving many other similar requests.

This option is part of the Making Home Affordable Plan, which was designed to help offset some of the dishonest lending practices that left many homeowners in the lurch. However, it may take many months for borrowers to be approved for this program, so it’s hardly a quick fix. Plus, it’s only open to homeowners whose first mortgage originated before January 1, 2009, and whose unpaid balance on the mortgage is not more than $729,750. You can look into whether you qualify here.

4. Get Rid of Your House

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. If that’s the case for you, there are two key options:

• Short Sale: 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. It’s up to the lender to decide whether allowing a short sale is in their best interest. This option may not be as damaging to the borrower’s credit as a foreclosure, but that’s only true if the creditor doesn’t report the debt reduction to credit reporting agencies.
• 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.

Not that both deed in lieu of foreclosure and short sale can have tax implications. Therefore, homeowners should consult with an HUD-certified housing counselor as well as a tax professional to determine the full implications of this move.

5. Declare Bankruptcy

Bankruptcy is no picnic. It’ll destroy your credit and likely make it hard for you to borrow any money for many years. Plus, depending on what type of job you hold, a personal bankruptcy can even be a bad career move.

That said, a Chapter 13 bankruptcy can make it possible for you to keep your home, but only if you have a solid plan to repay at least some of you debts. Unlike Chapter 7 bankruptcy, Chapter 13 requires that borrowers make an attempt to repay some of what they owe before the slate is wiped clean.

6. Walk Away

During the height of the foreclosure crisis, lenders faced a phenomenon they came to refer to as “jingle mail.” Homeowners who could no longer make their mortgage payments and had little or no equity in the property would send their keys to the lender and walk away from their homes. For those who are upside down in their mortgages and who’ve been unable to work something out with the lender, allowing a foreclosure to happen may be the only choice.

In recent years, many borrowers in default have managed to stay in their homes for months or even years without making payments. That’s because completing a foreclosure takes more than a year, on average. Plus, if borrowers choose to fight their evictions in court, they may be able to stay even longer while the case works its way through the system. Some people will argue that this is unethical, while others feel it’s the only choice they have.

Staying Off the Street

If you find yourself with no place to live, there are still options. The National Coalition for the Homeless has programs to help prevent people from landing on the streets, so contact them directly to learn about emergency assistance programs available in your area. You can also try a state homeless advocacy coalition. This a great option for tracking down housing partnership programs or other types of aid you may be eligible for from various nonprofit organizations. If you can’t get help or find the resources you need in your community, consider moving to one where you can.

There are several options available to borrowers who are facing foreclosure, but in order to avoid being kicked to the curb, homeowners need to be informed, move quickly and be proactive. Borrowers should also be on the lookout for anyone who tries to charge a fee, pressures them to sign over their deed or tries to collect mortgage payments. When it comes to foreclosure, there are many scammers out there looking to take advantage of struggling homeowners’ desperation. Just know that if you can’t pay your mortgage, there are some things you can do to make the best of a bad situation.