If You Can’t Afford Your Home Mortgage
When you began shopping for a house, you were approved for a mortgage based on your job history, current income and assets, credit score, and other factors. You bought a home that fit your budget and the monthly mortgage payments were reasonable — maybe even lower than the rent payments you made before buying!
So long as your financial situation remained about the same, you didn’t have to worry about being able to afford your housing costs.
And then … the unexpected happened. You or your spouse got laid off. You needed to pay off some steep medical bills or other unanticipated expenses. Suddenly, that monthly mortgage payment became more daunting.
Recalibrating Sense of Place
It’s happening to Jessica Huang, who bought a condo in Nashville and lived there for less than a year before relocating for a job opportunity. She’s renting it out and, for now, the rent covers her monthly mortgage payment. But she’s facing increasing condo fees and her property taxes are going up nearly 40 percent in 2018.
“If someone made me a really great cash offer, I’d consider selling,” Huang said.
In the absence of such an offer, though, she’s planning to hold onto her condo for at least a few more years. Nashville’s population is growing, and she hopes to eventually sell the condo for a profit that will serve as the down payment for a future home. In order to do that, she’s raising rent for next year, and keeping her fingers crossed that her current tenants don’t move out as a result.
What options do you have if you’re no longer able to afford your mortgage payments? There are a few avenues to consider, but the most important thing is to seek out help as quickly as you can.
Take In a Tenant
If you have the space, renting out part of your home can get you the extra cash you need each month to afford your mortgage.
Choose a tenant wisely by verifying their income and running a credit and background check. Call their previous landlords to see if they have a history of paying rent on time. Evicting a problem tenant can be expensive and time-consuming.
You should also consider how a tenant can create unexpected expenses for you — increased utility costs and wear and tear on your home, for example. Try and work these costs into their rent payment.
You could also rent a room on Airbnb for extra money, but keeping a space in top shape for visitors costs a lot. You’ll need to furnish and fix up the space, and get it professionally cleaned frequently.
Airbnb hosts usually stock up on snacks and coffee in order to get better reviews, too. This may not get you the steady income you’d need to afford your mortgage.
If you have excellent credit, refinancing your mortgage could lower your monthly payments by decreasing your interest rate, lengthen the term of your mortgage, or both.
Keep in mind that by lengthening the term of your loan, you’ll end up paying more in interest overall — but this could be worth it if your financial issues will continue for a long time and the longer loan term helps keep you in your home.
Refinancing isn’t free, though. You’ll need to repay closing costs, which are about 2-5 percent of your home’s value. This might offset any savings you get from refinancing, so it’s worth it to examine all costs before you do this.
If you’ve been paying private mortgage insurance because you put less than 20 percent down when buying the home, you can talk to your lender about dropping the PMI payment once you have 20 percent equity in the home, which can shave up to a few hundred dollars off your monthly payment.
Talk to Your Lender
Don’t try to ignore the bills you can’t afford to pay. Call your lender as soon as possible to work with them on possible solutions.
They’ll ask you:
Why you’re unable to afford your payments
If your financial troubles are temporary or permanent
What assets you currently have, what your income is, and what other expenses you have
If you’re moving because you’re in the military (which may qualify you for loss mitigation options)
If your situation is temporary, many lenders can put you on a repayment plan. You may also be offered a forbearance, where your lender will agree to temporarily suspend your payments for a short period of time. This could be a good alternative to refinancing.
Get Help From HUD
A housing counselor through the Department of Housing and Urban Development (HUD) can help you determine what housing programs you may be eligible for, and counsel you on budgeting, debt repayment, and other money concerns.
Talk to a housing counselor as you work with your lender, because they can help you evaluate the different options the lender offers you.
Scams abound in the world of foreclosure counseling, so stick to a counselor from the the Consumer Finance Protection Bureau’s Find a Housing Counselor tool, which only lists counselors approved by HUD.
Look Into a Mortgage Loan Modification
A loan modification is an adjustment to the terms of your loan to make it easier for you to afford your mortgage payments.
This is not the same thing as refinancing, where your original loan is replaced with a new loan with different terms. This could be an option for you if you don’t have excellent credit and the cash available to refinance.
To be eligible for a loan modification under the Making Home Affordable Modification Program, you must owe less than $729,750 on your primary residence, and you got your mortgage before Jan. 1, 2009.
Also, your payment must be more than 31 percent of your gross income and you are experiencing a financial hardship like a job loss.
There’s a misconception that declaring bankruptcy is an instant way to clear yourself of all debts and start fresh. And while that’s sort of how it works … well, it’s not pretty. But it may allow you to keep your house.
Chapter 13 bankruptcy can allow you to catch up on missed mortgage payments through a three- to five-year repayment plan.
A bankruptcy will stay on your credit report for 10 years, affecting your ability to obtain other loans or lines of credit. This should be one of your absolute last resorts.
Sell Your Home
While the best outcome is one that allows you to stay in your home, sometimes it’s just not possible.
So how can you get out of your house? There are ways to avoid foreclosure, but keep in mind that these all affect your credit score, so work with a housing counselor to weigh your options.
Deed-in-Lieu of Foreclosure: To avoid foreclosure, you voluntarily give ownership of your home to your lender. You’ll no longer be personally liable for the remainder of the mortgage. If you have equity in your home, you may get some money back.
Short Sale: Your lender agrees to let you sell your home for less than what you owe on the mortgage.
Regular Sale: Depending on the value of your home, you may be able to sell it for a high enough price that you can use the proceeds to pay off the remainder of your mortgage.
These options all allow you to avoid foreclosure, which would negatively impact your credit score for seven years. But keep in mind that short sales and deeds-in-lieu of foreclosure aren’t great for your credit, either.
Buy a Home With Both Eyes Open
Homeownership is often thought of as a guaranteed path to wealth, but it’s a huge commitment that isn’t for everyone at every stage in their lives. When house hunting, keep in mind that just because a lender approves you for a larger loan than you expected, it doesn’t mean you should increase your original housing budget as a result.
Friends and family may be egging you on to buy a place, but that might be more about their wants than your own needs. Huang learned this lesson with her Nashville condo.
“My mom pressured me to buy,” she said. “After that it was very obvious to me that I don’t have that kind of lifestyle. She is just the kind of person who really loves nesting. I think it’s her dream to buy a place and never, ever have to move.”
Huang, meanwhile, has relocated to four cities since graduating from college and isn’t sure if she wants to remain in Seattle, where she currently lives.
Understand the Costs
Don’t forget to keep in mind the ongoing costs of homeownership beyond the mortgage and closing costs. You’re now responsible for maintenance (about 1 percent of your home’s value each year), repairs, renovations, and other expenses. If you pay condo or HOA fees, there are many maintenance costs to your building or neighborhood that are beyond your control, as well.
“It’s not like you buy a house and stop paying rent and everything’s free,” Huang said. “There’s a lot of money you don’t get back.”
Since buying her condo, Huang has been on the hook for building improvements.
“Being part of an HOA can be really problematic at times. Two years ago they wanted all the units to replace all the windows, and this year they decided to change front entry doors and storm doors,” she said. “At the end of the day, maybe it helps the complex increase its value, but they’re not necessarily changes that I would have felt like investing in on my own.”
Before You Buy
If you’re thinking about buying a home:
Be mindful of your budget, and work with a financial planner or coach to help you come up with exact numbers before you talk to lenders.
Avoid family pressure to buy more home than you can afford, or to buy a home in the first place if it’s not right for you.
Build up your emergency savings. Aim for three to six months of living expenses in a savings account that in a different bank from your checking account. This makes it harder to access your cash in a non-emergency, but the money is available if you need it.
Get pre-approvals from more than one lender. Often people just go with their bank or the lender their realtor recommends, but shopping around can lead to you finding a lower interest rate (and a lower monthly payment as a result).
Consider the ongoing costs of the homes you like. Never underestimate the expense of a large yard, a longer commute, and upcoming renovations to freshen up outdated rooms.
Take care of your credit, both before and after you buy. Make on-time loan payments for your mortgage and other loans, and avoid credit card debt. This will make it possible to refinance in the future.