8 options when you can’t afford your mortgage anymore

If you find yourself having trouble keeping up with your mortgage thanks to a job loss, medical bills, or other financial hardship, you’re probably wondering what your options are. Well, the good news is that you have many.

Some of the options you can pursue on your own. But if you’re looking for answers to mortgage issues, it can be a good idea to get information from organizations such as the U.S. Department of Housing and Urban Development, or an attorney. If you need help finding an attorney, consult the American Bar Association to find one who’s right for your situation.

Whatever route you choose, here are eight options to get you started on figuring out what to do when you can’t afford your mortgage anymore.

1. Refinance Your Home

If your mortgage interest rate is higher than today’s rates, refinancing your mortgage could lower your monthly payment enough for it to be affordable. But it’s vital that borrowers pursue this option before missing payments, said Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”

“Lenders would much prefer to work with you, and a clean refinance is easiest on everybody, and most profitable for them,” said Fleming. He added that recasting your loan to a new 30-year term could lower your payment even if rates aren’t that much lower. “This would always be my first solution if it is possible,” said Fleming. Just be prepared for the paperwork. As with any real estate transaction, the bank will want bank statements, proof of income, and more, he said.

2. Declare Bankruptcy

Like most responsible people, you might think filing for bankruptcy is an absolutely last resort. But that’s not true, said Jen Lee, an attorney who specializes in helping businesses and individuals with credit and debt issues. “It is often very useful, especially Chapter 13, for reorganizing debts and saving a home from foreclosure,” Lee said. “I talk to many people [for whom] going into bankruptcy earlier rather than later allowed them to keep the house.”

But filing for bankruptcy is a hefty decision to make. Fleming agreed that with the help of a good attorney, this could be a good move — but homeowners must know the risks. “It ruins your credit and stays on your credit report for ten years, but surprisingly you could qualify for prime credit mortgage financing again in as little as two years,” Fleming said.

3. Decide on a Short Sale

A short sale means you sell your home for less than the amount you owe on your mortgage, but, importantly, your lender agrees to take that amount as a full payoff of your loan. Fleming said that this is much easier on your credit than a foreclosure.

However, he adds that this process takes diligence and patience, and starts with contacting your lender or mortgage servicer. “It is a long and arduous process, but it demonstrates that you were willing to work with the lender,” said Fleming. “You will qualify for prime financing again within two to four years after a short sale is completed.”

4. Complete a Deed in Lieu of Foreclosure

With a deed in lieu of foreclosure, your lender agrees to cancel your mortgage debt in return for the voluntary forfeiture of the deed to your home to them. This option might have tax implications and becomes more complicated if you have other loans on the home, said Lee.

Fleming said that this option is about the same as a short sale as far as your credit is concerned. It will negatively affect it, however, it’s less harmful than a foreclosure or a bankruptcy and you could qualify for another mortgage in a few years, he said.

5. Negotiate a Loan Modification

A loan modification is a negotiation with your current lender in which your lender agrees to change the terms of your original mortgage. This could mean lowering your monthly payments or lowering your interest rate, which would also lower your monthly payments. Fleming said loan modifications are rare these days, but if your lender is open to it, it could be a great option.

Lee said the first step is contacting the lender. She advised that those seeking a loan modification should be diligent about submitting paperwork, following up daily, and proving that you are able to make the proposed modified payment. “You need a lot of patience and organization to get this done,” said Lee.

6. Take Advantage of a Reverse Mortgage

With a reverse mortgage, the lender pays you a monthly amount instead of you paying them, according to the Federal Trade Commission. This is basically a loan against the equity you hold in your home. A reverse mortgage is only available to those age 62 and older, and can be a great move, said Fleming.

With this option, there are other factors you should consider. For instance, you will still pay property taxes and insurance, and be required to maintain your home, said Fleming. Also, according to the FTC, there are fees and costs involved to set it up, and interest accrues on the amount you receive. So, when you or your heirs sell the home to pay off the reverse mortgage, it will be for more than you received.

7. Sell or Rent Your Home

If you can sell your home for the amount you owe or more, you should consider that option, according to both Fleming and Lee. Fleming said delaying selling when it’s clear that you can’t hold onto it often digs into your equity — and thus your profits, when you are eventually forced to sell. “Also, if you wait until you fall behind on your mortgage, it is public record and you may get only low-ball offers for your home,” Fleming said.

A close second choice to selling your home is to rent your home to cover the mortgage payment while you live elsewhere. Renting out your home might not be the most attractive option, but if it bridges the gap until you can afford your mortgage again, it’s better to embrace it than not, said Lee. “One of the biggest mistakes I see is that people ignore the problem and then the number of options is drastically reduced,” she said.

8. Walk Away

If you’re faced with a mortgage worth more than the value of your home, you might be contemplating walking away from the property and letting it go to foreclosure. This is almost never a good idea, said Fleming.

“This is my last option because, in most circumstances, you will not qualify for prime mortgage financing again for seven years after a foreclosure,” said Fleming. Plus, he said many states are “recourse” states, which means that if the sale of the house doesn’t cover what you owe, the lender can come after your other property or even attempt to garnish your wages. “I can’t imagine a case where this is a good solution,” said Fleming.

From GoBankingRates.com: 8 options when you can’t afford your mortgage anymore