Know your options: mortgage delinquency

A home can be many things besides just a piece of real estate: It’s your safety, security, and a place for your family to come together and enjoy life. Sometimes homeownership can take a turn, however – especially if you find yourself behind on your mortgage payments due to the job market or other challenges. 

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Being saddled with a delinquent mortgage can be stressful, but there are options to get past this debt snag so you can fully enjoy your home once again. 

What is mortgage delinquency?

Being delinquent on your mortgage means you’re past-due on the amount you owe. Technically speaking, this means your mortgage is delinquent as soon as you miss the due date, even by one day. 

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Once your payment is 30 days or more past due, your mortgage goes from being delinquent to being in default, which is more serious. Many people use these two terms interchangeably, however. 

What happens to a delinquent mortgage?

No one plans on being 90 days or more past due on their mortgage, but sometimes it’s out of our control. You can prepare for the best course of action going forward if you understand some of the consequences of mortgage delinquency. 

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Your lender may reach out to you as soon as your first missed payment. If you’re unable to make up your payment during the grace period (usually seven to 10 days), you may be charged a late fee as specified in your contract. This is typically around 5% of your payment amount. 

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Once your payment is overdue by 30 days or more, your lender may also report it to the credit bureaus, which can cause your credit score to drop further with each month that passes without bringing your mortgage current again. 

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Eventually, your lender may write off your mortgage and/or transfer it to a debt collector, who may pressure you to pay back your debt. Your home may be put into foreclosure proceedings, causing you to lose it. 

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Each of these events can cause significant damage to your credit score that takes years to recover from, although the marks will fall off of your credit report entirely after seven years. In the meantime, it may be difficult to get approved for other types of financing or even to get approved to rent a home or apartment.

What can you do about mortgage delinquency?

Mortgage delinquency can have serious consequences, but you have a lot more power than you might realize to prevent it. 

Know your rights

The federal government has your back and offers a lot of protection against harassment and unreasonable contact from debt collectors. Make sure you know your rights and how to use them.

Look at your budget

Taking an honest look at your budget (or creating one for the first time) is an important first step in identifying any potential ongoing problems as well as your options going forward. There are many ways you can address a mortgage payment that no longer fits in your budget, but to do so, you’ll need to know what you can afford right now. 

Communicate with lenders

For many people, reaching out to your lender is one of the scariest steps. It’s better to be proactive — even before you miss a payment at all, if possible — and discuss options with your lender. Remember, the collections process is expensive for them, too, so they have a financial incentive to work with you. 

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Your lender may offer options such as:

• Forbearance: A temporary break from making any payments during short-term setbacks such as job losses or natural disasters. 
• Repayment plan: Make up your overdue payments by splitting them up and adding them to your regular mortgage payments over the course of several months. 
• Loan modification: A permanent change to your loan to make it more affordable without having to refinance, such as with lower interest rates or increased loan term lengths. 

If you have a government-backed loan such as an FHA mortgage, you may also be eligible for special loss mitigation programs that can help you fix your delinquent mortgage.  

Explore assistance programs

State and local governments, as well as nonprofits, often feature assistance programs for homeowners facing delinquent mortgages. You can find support options with your state’s housing finance commission. You can also call or visit 211.org for personalized help in navigating programs available in specific metro areas and rural communities. 

Refinance your home

Most lenders won’t refinance delinquent mortgages due to associated higher foreclosure rates; however, this can be an option for lowering your payments once you’ve paid off your past-due balance and can qualify for a more favorable adjusted rate. Remember, however, that a delinquent mortgage can have a negative impact on your credit score for several years even after you make up your overdue payments, so refinancing may still be difficult. 

Rent out the property

If you don’t need to live in your home (or at least your entire home), one option is to rent it out. This can be a good way to earn extra income to bring your mortgage current, as well as maintain a steady stream of income to ease any long-term cash flow concerns. You can also consider alternative ways to rent your home, too, such as Airbnb or Hipcamp. 

Sell your home

An easy way out of a delinquent mortgage is to sell your home, especially if you want to move or already have a primary residence elsewhere. In some cases, your lender may allow you to do a short sale where you sell the home for less than the remaining balance on your mortgage. This can still negatively impact your credit score, but not as much as a foreclosure would. 

Use a deed in lieu of foreclosure

Another option, if you’re not looking to retain your home, is a deed in lieu of foreclosure. If your lender agrees to this process, you can simply swap the deed to your home in exchange for your lender forgiving the remaining balance and releasing you from your mortgage. You may lose any equity you have in the home, however, and most lenders require you to try and sell your home first.  

Consolidate your debt

If your mortgage is unaffordable because you have other debts that are consuming more of your cash flow — especially high-interest credit cards — then a debt consolidation loan can help make those payments more affordable by combining them into one lower-interest loan.  However, as with refinancing, you’ll typically need a good credit score in order to qualify for lower rates than what you’re already paying.  

Consider bankruptcy

No one likes mentioning the “B” word, but under the right circumstances, it can also serve as a beacon of hope. Most people imagine Chapter 7 bankruptcy, where you sell your assets in order to pay back your debts, but Chapter 13 bankruptcy may be a better solution for many homeowners. Chapter 13 bankruptcy, also known as debt reorganization, generally allows you to keep your home and pay back your debts over the course of a three- or five-year court-approved repayment plan. 

Get outside help

If you’re confused about your options, a fiduciary, fee-only financial advisor can help provide unbiased advice. A good alternative is the National Foundation for Credit Counseling, which offers affordable and personalized assistance from reputable consumer credit counselors. 

Final thoughts

You can recover from a delinquent mortgage, even if it seems tough right now. Judging by mortgage delinquency rates, your situation is not uncommon, and that’s why there are so many resources available for you. A good first step is analyzing your financial situation, reaching out to your lender for support, and considering your options from there. 

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We’ve covered a few avenues you can explore, but there are many more. Point works with homeowners who are delinquent on their mortgages to tap into their home equity and use those funds to get current on their home loans again. Whichever route you choose, make sure you consider how to recover your credit score and your finances so you can come back even stronger than before.