What happens if you can’t pay your mortgage?

No one anticipates falling behind on their mortgage payment, but life has a funny way of throwing a wrench in our plans. Whether it’s a job loss, extended illness, or another unexpected event causing financial distress, sometimes making that house payment is tough.

If you’re struggling, it’s important to contact your mortgage servicer immediately so they can better understand your situation and go over help that may be available like forbearance or a loan modification. We’ll explain what happens if you can’t pay your mortgage, but we also want to make sure you understand your options.

Evaluate your financial situation

The first thing you should do when trying to get your arms around what happens with your mortgage payment in the long term is to do an honest appraisal of your overall financial picture. Ask yourself the following questions:

• Is the change in my situation temporary or likely to be longer-lasting?
• If I cut discretionary spending, will I be able to make the mortgage payment?
• Do I have the bandwidth to take another job and supplement my income?
• Does keeping onto the house prevent reaching other long-term financial goals or stability?

We’ll go over several alternatives for those having trouble with their payment, some of which involve staying in the house and some that involve moving on. Your answers to these questions will start giving you some guidance as to what might be right for you.

Exploring refinancing as an option

If your financial situation is changing shortly, you may be able to refinance your mortgage, taking a new loan at a different interest rate to lower your payment or consolidate debt, among other goals. You’ll want to do this before you fall behind because you can’t qualify while in default.

Let’s run through a couple of common options.

• Debt consolidation: If you have enough equity in your home, debt consolidation could be a good option to roll things like high-interest credit card debt and personal loans into your mortgage to save money by paying it off at the lower mortgage interest rate. You generally need 20% equity after refinancing and a 620 credit score, but there are exceptions. You can use an FHA loan to take cash out with a 580 credit score if you’re using it to consolidate debt. We offer VA loans that allow you to extract all your equity with a score as low as 580, but there may be more payment flexibility with a score of 620 or better.
• FHA Streamline: For those currently in an FHA loan, you may qualify for an FHA Streamline, a loan designed to lower an existing monthly payment or interest rate.
• VA Streamline: Also called an Interest Rate Reduction Refinance Loan (IRRRL), a VA Streamline is the VA option for clients who are looking to lower their interest rate or monthly payment. There are lower VA funding fees associated with this refinance as well.

If you want to find out whether this is a good option for you, check out more of our refinancing content.

Contact your mortgage servicer

Once you’ve evaluated of your situation, speak to your mortgage servicer as soon as possible to determine what relief options may be available. Your mortgage servicer is the entity that collects your mortgage payment. This may not be the same as your lender.

Before reaching out, be aware that your lender is going to ask for detailed information on your financial hardship. They also may ask for asset and bill statements to get an idea of your expenses. Your servicer has to qualify you for any relief you receive.

Because you’re not making your payment under the terms of the contract, there’s usually a credit penalty associated with many of the forms of mortgage relief discussed here. Expect your credit score to drop, at least temporarily. The exception is for assistance given in the wake of a natural disaster.

Rocket Mortgage^® clients can reach out about relief by signing in to their Rocket Account, and navigating to Help > Payment assistance under the Mortgage tab.

Look into reinstatement

Reinstatement is the act of paying back all past-due payments and fees in one payment. While this doesn’t work for everyone, it’s the fastest way to get back to current on your mortgage. An example of when this might work would be an employer coming through on their promise of back pay.

Before reinstating your existing loan, you should request a reinstatement quote from your servicer to make sure you’re fully paying off any existing past-due payments.

Talk about a repayment plan

If reinstatement doesn’t fit your finances, the next option your servicer may look at is a repayment plan. These are short-term, often lasting 3 – 6 months. A portion of your past-due amount is added to your monthly payment until it’s fully paid off and you’re current again.

Discuss forbearance options

A mortgage forbearance is a temporary pause or reduction in your house payment. Like repayment plans, these are often short-term in nature but may be extended up to a year depending on your circumstances. It should be noted that the longer you’re on forbearance, the harder it may be to catch up on your payment.

Your servicer may offer this if a temporary break on the payment is likely to help you regain firmer financial footing moving forward.

Investigating loan modification possibilities

A loan modification is intended to help you get current by adding past-due payments and fees back into your loan balance while changing the terms of your loan by changing your interest rate for extending the term.

A loan modification can damage your score, but it’s also less of a credit hit than you would see from a foreclosure. There’s a trial period of 3 months before the modification becomes permanent. If you miss payments, the modification will fail.

See if you qualify for a deferral or partial claim

In some cases, you may qualify to have some or all your past-due balance deferred until your loan is paid off, refinanced, or the home is sold. A partial claim is like a deferral except the past-due payments are put into a second lien that’s paid off when you pay off the home.

Consult a HUD-approved housing counselor

If you’re looking for advice that keeps you in your home or helps you gracefully transition into the next living situation, the U.S. Department of Housing and Urban Development offers housing counseling services. To get started, you can reach out to (888) 995-HOPE.

Benefits of professional guidance

A housing counselor can look at your budget and help you come up with viable solutions to sustain your home or determine that it’s time to move on. A professional will be able to take a dispassionate look at your entire situation and give advice on how to move forward in a way that you may not be able to see in your distress.

Locating a reputable counseling agency

HUD maintains a directory of housing counselors. You can find one near your ZIP code. The directory also has the option to let them know what service is being sought to further filter your results.

Be cautious of scams

Unfortunately, mortgage relief scams preying on people when they’re at their most vulnerable are all too common. Be aware that the following are signs someone might be trying to take advantage of you:

• Requesting money up front for a loan modification
• Not providing documentation from your servicer regarding modification terms
• Not disclosing fees up front
• Anyone other than your servicer requesting payment via cashier’s check, mobile app, or wire transfer
• Asking you to sign the deed of the home to their company
• Failure to disclose that you have to be approved for the modification and your servicer doesn’t have to change the loan terms
• Telling you not to talk to your servicer or lender

Understand potential consequences of missed payments

Missed payments can lead to late fees. If you miss enough of them, you can lose your home. Let’s talk briefly about the impact of foreclosure and some of the alternatives you may have if you’re not able to stay in your home.

Impact of foreclosure on credit

Foreclosure refers to a lender’s ability to take back your home based on the lien associated with your mortgage if you default. Default is a breach of your mortgage contract. The most common form of default is nonpayment.

There are both judicial and nonjudicial foreclosures, depending on state law. The difference is that judicial foreclosures require a court order.

In either case, foreclosure tends to be a last resort. Except in rare cases like the unreported sale of your property, the actual foreclosure process doesn’t start until you’re 120 days late in many cases. You’ll have ample opportunity to work with your servicer on alternatives to foreclosure. This is important because foreclosure drops your credit score significantly and remains on your report for up to 7 years.

Alternatives to foreclosure

If staying in the home isn’t viable, there are other options that may enable you to gracefully exit the home or rent it out to cover the payment. Let’s take a look at these and some servicer-approved options if that doesn’t work out.

Selling your home as a viable option

If you just want to move on, the best scenario is to sell your home. You can use any money left over after the payoff toward your down payment or rent on your next space. If you can make a full payoff, this may be the way to go because there’s no negative credit impact of a traditional sale.

Renting vs. selling: Weighing the pros and cons

If the home is a second home or you have an alternative living arrangement you’re able to find, you could rent out your home to have someone cover the mortgage payment. Over the long term, this could become a passive income stream for you once the mortgage is paid off. But becoming a landlord has its own pros and cons:

Pros

• The rent could cover your monthly mortgage payment.
• Long term, this could turn into a source of income for you.

Cons

• Becoming a landlord means dealing with requests related to the property whenever things go wrong.
• Local authorities have their own laws that apply to landlords. For example, you may need special property inspections.
• The renters themselves may miss payments.
• When renters move out, you’ll have marketing expenses and potentially months where the house sits empty due to turnover.

Servicer-approved alternatives

If the current market value doesn’t support selling the home for the payoff amount, your servicer may approve a short sale of your property. In this scenario, all offers are passed through to the servicer who has final authority over the sale.

Although this reduces your credit, you may be able to get a new home after a short sale sooner than you could after a foreclosure. If the new loan is an FHA loan, there may be no waiting period under the following circumstances:

• No 30-day late mortgage or installment payments in the 12 months leading up to the sale.
• No payments that are 30 days or more late in the 12 months prior to the application for your new loan.

If you don’t want to deal with a sale at all, another option is a deed in lieu of foreclosure. In a deed in lieu, you give the property back to the lender. However, if you do this, know that there’s a minimum waiting period for a new mortgage of 2 years for a VA loan, 3 years through FHA, and 4 years for a conforming conventional loan.

There are a couple of other things you should know about deeds in lieu and short sales. In both cases, lenders may have the ability to pursue you for a deficiency judgment for the difference between the sale price and the balance owed, depending on state law. Lenders may waive this. Make sure you communicate with your servicer to understand whether they’ve done so.

Finally, a servicer may be able to offer you a cash incentive for keeping the property up until it sells that you could choose to use toward your next place.

FAQ

Now that you know the basics of your options, let’s try to answer some of the most common questions.

What is considered a hardship for a mortgage?

There are many potential reasons for hardship, including job loss or reduction in income, increases in expenses, divorce, and the long-term illness or disability of yourself or a family member. The list isn’t exhaustive. Your servicer may ask for documentation as well.

How long can I go without paying my mortgage?

If the reason for taking back the house is nonpayment, you need to be 4 months delinquent. However, because of the negative credit impact and fees that come with being late on your mortgage payment, we stress the importance of reaching out to your servicer at the first sign of trouble.

What happens if I lose my job and can’t pay my mortgage?

If the job loss results in a temporary loss of income, you may qualify for forms of relief like forbearance. You would pay back the amount you owe once you get a new job. If the loss of income was long-term, you might have to speak to your servicer about other options.

What happens if I never pay my mortgage?

If you never pay your mortgage, your property gets foreclosed upon. We recommend prioritizing your mortgage payment at all times both for the roof over your head and avoiding the long-term financial consequences.

Can I get a break from paying my mortgage?

If you have a legitimate hardship, you may qualify for a forbearance, which is a temporary pause or reduction in your mortgage payment. But you want to be on one of these for as little time as possible to make it easier to pay back and get current again.

The bottom line: Communicate with your lender when mortgage payments are a struggle

If you’re having a hard time making your mortgage payment, communicate openly and promptly with your servicer. They’ll be able to go over any options you have for staying in your home, like forbearance, repayment plans, and loan modifications. Any relief could have a temporary negative impact on your credit score, but it’s better than foreclosure.

If it’s not realistic for you to stay in your home, the best thing to do is sell the property or look at renting it out because there is no credit impact. If doing this doesn’t pay off the balance or solve your cash flow challenges, you can then look at servicer-approved options such as deed in lieu or short sale.

If you’re a Rocket Mortgage client having trouble making your mortgage payment, reach out to us through the Mortgage tab of your Rocket Account. Navigate to Help > Payment assistance.