The alarm goes off. You wake up and rub the sleep from your eyes. You brush your teeth, have a quick breakfast, and drive to work. Once you get to the office, you say hi to your coworkers and briefly chat about your weekend. Everything seems normal. Just another workday. But then, your manager calls you to his office and gives you the worst news you’ve had in years. Due to company-wide restructuring and new automation implementation, your current skills are no longer needed.
You’re being laid off.
It’s real, you lost your job and only source of income.
After your stomach finally settles, and go through several haphazardly put together ways to break the news to your family in your head, you are kicked in the gut again by another realization. You can’t afford your mortgage payments anymore. You’re going to lose your home.
For all of us who have been in that situation, it can be easy to feel overwhelmed and go into panic mode, especially if you don’t know what options are available to you. The good news is that you have several options at your disposal. If you’re well informed on them and take quick action, you’ll have a higher chance that you’ll get to keep your house and protect your credit score.
Let’s analyze 10 options at your disposal. This is not an exhaustive list of options, but it is a good place to start your research.
1. Contact your lender and ask for a forbearance program or loan modification
A common trend you’ll find in all of these strategies is how you need to act in advance. If it’s obvious that pretty soon you won’t be able to make the next mortgage payment, don’t wait until you’re delinquent on your payments and start getting calls from your lenders demanding you to pay up. The earlier you contact your lender and explain your situation, the better your chances will be that you’ll be able to negotiate a solution.
Before your lender approves any changes on your loan, you will need to put together a letter of hardship. In this letter, you will need to explain how you got into your current situation, especially any changes that affect your ability to make your mortgage payments, what steps you have taken to get yourself out of your situation, and why your current hardship is impossible to change and will only get worse.
This is not the time to paint an optimistic picture. It’s called a letter of hardship for a reason. If the bank finds an opening to spin your words into a situation that isn’t as bad, they’ll jump at the chance. If you need an example of a hardship letter, you can search online for an example.
Ask what options are available. The only way to know for sure is to ask. Obviously, you would need to meet some requirements, and different banks have different ones. Your lender may offer a forbearance program, which can lower or even suspend your mortgage payments temporarily until you can get back into normality.
If you don’t qualify for forbearance, ask about a mortgage modification. One of those programs take a certain number of mortgage payments and add to your total balance, and/or modify your interest rates in order to cover the difference. True, you’ll end up paying more in interests, but you’ll have some breathing room and stave off foreclosure for a while.
2. See what options your mortgage insurance gives you
There’s a good chance that when you applied for your loan, you were offered mortgage protection insurance. You can think of it as a kind of life insurance that covers your mortgage in case of death, disability or job loss. If you agreed to it, now’s the time to review it.
These insurance programs will cover your mortgage payments, taxes and home insurance payments for a certain period of time, usually between six months to a year. Be aware that they usually only pay for the principal and interest, up to a certain amount of money per month.
You’re still liable to pay HOA fees and utilities, and there’s usually a waiting period before the cash comes in. After that period of time has expired, you will have to resume your mortgage payments. Again, not a permanent solution, but it can take a huge source of financial stress from you as you secure a new source of income.
3. Create a cost of living analysis and dig into your savings
After trying to remain calm, and looking for a new job, the next best thing you can do is to calculate your living expenses and reduce your spending. Get together with your family and make a list of things you can all cut down on.
Once you have a plan and budget, calculate how long you can live off your savings, and still pay your mortgage. Make sure that you include in your equation any severance payments, unemployment and tax benefits and financial aid you may receive from the government, and every source of income you have.
If you can live off those saving for at least 6-8 months, make an honest assessment about your chances of getting a new job or source of income that will pay for your mortgage payment and your everyday expenses. However, if you only have 2-3 months to go before you run out of funds, it’s time to cut your losses and take more drastic steps.
4. Look for government assistance for job loss
Depending on your mortgage terms or applicable insurance, your property’s location, past military service and other qualifications, you may be able to get mortgage assistance from the FDH, Veterans Affairs, the U.S. Department of Agriculture.
These organizations have several programs that may make it easier to pay your mortgage, and even provide you with loans payable once you sell house fast miami. The Home Affordable Unemployment Program could reduce or pause your mortgage for up to a year if you qualify.
The FHA Home Affordable Modification Program could help you lower your monthly payments, and the Hardest Hit Program gives aid to states most impacted by the economic crisis through mortgage assistance for the unemployed, principal reduction, and transactional assistance.
In order to be better informed about the options available in your current situation, it’s best to make an appointment with a mortgage expert in order to examine all options as well as terms and conditions.
Depending on the amount of equity your house has accumulated, and the current mortgage rates, you may be able to refinance your home in order to lower your monthly payments. Refinancing is a fairly straightforward process, in which you go through basically the same steps you took when you originally obtained your home mortgage.
Because refinancing is heavily based on your credit score, income, and debt, as well as your current home’s value, it’s better to apply as soon as possible.
Refinancing does come with some downsides. The main one is that you’re basically starting from zero on a 30-year (or longer) loan. You’ll have a lower, more affordable monthly payment, which may allow you to keep your home and your credit score intact, but in the long run, you’ll actually be paying a lot more in interests.
You’ll also be liable to pay closing, appraisal, application, and loan origination costs among others. Make sure that those expenses make sense, and that you don’t end up shooting yourself in the foot because you didn’t do your due diligence and you ended up exhausting your saving even faster.
6. Rent out your home
If there is a large demand for housing in your area, but selling your home wouldn’t cover your mortgage payment, you could consider renting it. True, being a landlord is a lot of work, not to mention that any rent you obtain is taxable as income, there are a lot of tax benefits and write-offs available if you do your research.
If you’re lucky and are able to find a job in the short term, and you find an affordable apartment to live in, you might even turn a profit during the rental period.
7. Bite the bullet and declare bankruptcy
Ugh, the dreaded “B” word. All of us shudder to even think about declaring bankruptcy. But in certain situations, it can provide the break you need in order to get your economic situation back in control. Chapter 13 bankruptcy may protect your home from being foreclosed.
Foreclosure is a collection action because your lender will try to recuperate their losses by taking your home and selling it. When you file for Chapter 13 bankruptcy, you are protected from creditors from taking collection actions, including repossessing your home, unless they file a claim to court for permission to collect.
The big downside is that your credit will be seriously hurt for quite a while, and your bankruptcy will remain on your credit report for a decade. This will make it a lot harder to qualify for credit cards, mortgages for a long time, and might even affect your ability to get certain jobs. Think of bankruptcy and financial chemotherapy. It may be able to destroy a serious financial “cancer”, but it will also take a toll on your financial health for a while.
8. Sell your home
Again, a time sensitive option. If you can’t afford to pay your mortgage, but you still have a few months to go, selling your home could be a good option. In order for this to be an option at all, your house needs to sell for at least enough to pay your mortgage, and your agent’s fees.
If your home has already appraised in value, and your agent knows how to price your home to sell, you will be able to sell it pretty quickly, and possibly even profit from it.
It’s extremely important that you don’t miss any mortgage payments before you sell because if you do, said delinquency will go into the public record, thus guaranteeing that you’ll get nothing but lowball offers on your home from buyers.
9. Request from your lender approval for a short sale or a Deed in Lieu of Foreclosure
A short sale is when you end up selling your home for less than what you owe on your mortgage. In order to qualify, you will need a letter of hardship, just like in option 1, and the approval from your lender. It’s basically a less harsh alternative to a foreclosure because it won’t damage your credit score nearly as much as a bankruptcy or a foreclosure would.
All money from the sale will go to the lender, but you might be able to negotiate for financial assistance to relocate to a new home.
However, even if the creditor agrees to the short sale, under some circumstance you will be liable to pay for any difference from the selling price to the value of the mortgage. Some states allow lenders to sue for the difference, and if you can’t afford it, the IRS might tax it from your personal income.
Another alternative to foreclosure is when you hand over your deed as a payment for the mortgage you owe. If your lender agreed to it, your credit won’t take a hit, and if the house has already accumulated some equity, you might be able to receive some of that surplus once the property is sold. This option could have some tax consequences, so make sure that you check your state’s income tax law before you follow through with this option.
10. Sell your home to a real estate investor
We already talked about selling your home as an alternative to getting your home foreclosed, so isn’t selling your home to an investor basically the same? Not necessarily. When you sell a home through the normal process, you go and hire a real estate agent, fix up your home, have an open house, put signs in your yard, and so on. There’s nothing wrong at all with this approach, but it may not be quick enough for your needs.
You would also be liable for all the costs associated with paying a real estate agent for his or her services, and all the stress that comes with the process. When you’re already dealing with a dwindling bank account, the stress of not having a job, and a worried family, dealing with the home sale process could be a fast lane to a mental breakdown.
There are real estate investors and companies, such as us here Property Nation, that specialize in purchasing property in cash from homeowners going through hardship such as foreclosure, divorce, forced relocation, and other difficulties like losing your job.
The process is relatively quick and straightforward, and because there is no need for a real estate agent to act as an intermediary, you get to avoid agent fees.
As real estate investors, we usually absorb closing costs as well. You are not obligated to accept any offer we make you, and the offers are similar to if not better than any you would receive from a regular buyer.
Selling directly to a real estate investor will also protect your credit score, which will be instrumental when your economic situation improves and you decide to apply for another mortgage in the future.
We hope that you never have to deal with foreclosure or loss of employment, but it’s good to be prepared in case you’re faced with economic difficulties. By understanding your options, you’ll be able to keep a clear head and avoid making your situation worse by making poor decisions.