During the COVID-19 pandemic, many Americans lost their jobs, experienced acute illness or suffered long-term effects of infection from the virus. At the same time, list prices for homes across the country skyrocketed, bidding wars broke out and houses sold far above asking. More than two years after the pandemic began, some of us are still struggling to make our mortgage payments. There are dozens of reasons why a homeowner might be unable to make their monthly mortgage payment. To push their way into the housing market, some new homeowners accepted higher monthly payments than they could afford. Others lost their job, welcomed a baby, became a family member’s caregiver or sustained an injury or illness of their own. Still others suffered a natural disaster or undisclosed damage to their property at the time of sale. Millions of Americans are barely scraping by due to inflated prices of everyday goods, which are affecting their ability to pay down debt. According to Jessica Dickler in a recent article for CNBC, 64% of the U.S. population is now living “paycheck to paycheck” due to the high cost of necessary goods. No matter what the reason – illness, injury, job loss, natural disaster or something else –, homeowners have a slew of options when unable to pay their mortgage. In this post, we answer all your FAQs about missed mortgage payments and explain how homeowners can protect themselves from foreclosure and other penalties. Follow below to learn what to do if you can’t pay your mortgage loan.
Answering Your FAQs About Missed Mortgage Payments
What happens if you miss just one payment?
Foreclosure typically results in a financial loss for the mortgage company. After all, lenders make a lot of their money off interest payments. Given this, most lenders allow several missed payments before entering the foreclosure process. Lenders understand that missing a credit card or student loan payment happens – whether by accident or a temporary lack of funds. The same is generally true for mortgage lenders. One missed payment – especially one missed by just a few days – is unlikely to impact your credit worthiness or loan terms.
Kim Porter explains in her article “What Happens If You Miss a Mortgage Payment?” for Credible.com. Porter writes that “most loan servicers offer a grace period where you can make a payment within 15 days after the due date without penalties.” It is only after your lender’s grace period that the company might charge a late fee, which Porter notes are in your contract.
According to Porter, your mortgage servicer will probably report the overdue payment after 30 days of delinquency unless the two parties previously discussed a reason for delay. After sixty days, you will have missed two payments and the issue will likely become more serious – e.g. a late payment and/or reporting overdue payments to credit bureaus.
When does the foreclosure process begin?
Foreclosure is unlikely before four consecutive missed mortgage payments or 120 days after your last monthly payment. Mortgage lenders cannot foreclose on your home without alerting you. Scott Steinberg explains in his article “What Happens If You Miss A Mortgage Payment?” for Quicken Loans. Steinberg writes that “after the third missed payment…you may receive a notice of pre-foreclosure.” At the same time, your lender will probably “let credit bureaus know about a third late payment,” which could further impact the credit scores of both you and your co-owners.
After a fourth missed payment and no alternative agreement like mortgage forbearance or loan modification, your mortgage lender will probably enter into the foreclosure process. To begin, your lender will serve “legal papers,” which are a “preface to lenders going to court to take title of the property, so they can sell it off and reclaim their losses.” Of course, there are many ways to avoid foreclosure – even if you are unable to make the monthly mortgage payments outlined in your contract.
What are the impacts of foreclosure or defaulting on your loan?
There are both short-term and long-term consequences of defaulting on a mortgage. Some default strategically, while others do so out of necessity. Either way, foreclosure can impact one’s credit score and overall credit worthiness – which can affect future lending opportunities and much more. Often worse, foreclosure typically results in displacement and plunging credit ratings can make it difficult to find a rental or buy another home. According to Jim Akin in a post for Experian, a foreclosure “entry remains on your credit report for seven years from the date of the first missed payment that led to the foreclosure.” Like any other derogatory mark on your credit report, a foreclosure will lower your score. Both lenders and landlords will probably consider your credit score when weighing a new lease or loan.
What happens during the foreclosure process?
In her article “Foreclosure: What It Is And How It Works?” for Forbes Advisor, Natalie Campisi looks beyond the consequences and explains the foreclosure process. First, Campisi notes that foreclosures can be either judicial or non-judicial depending on the laws of your specific state. In a judicial foreclosure, your mortgage lender will “file a lawsuit to initiate foreclosure.” Both the borrower and lender will meet in court and if the borrower loses their case, “the house will go into foreclosure” and might sell at auction. Alternatively, a non-judicial foreclosure “relies on power-of-sale clauses in the mortgage or deeds of trust to recoup the balance owed if the borrowers stop making payments.” You will handle these disputes outside of court.
Most homeowners can remain on their property until the house sells and the “foreclosure process is complete.” If the house sells for more than what you owe your lender, you will receive a check for the difference. If the house sells for less than what you owe, your lender might file a lawsuit that requires you to pay the remainder. As Campisi notes in her article, some states prohibit this action by law. However, you might still owe overdue property taxes. Consult your contract for more information.
Is mortgage forbearance under the CARES Act still available?
Mortgage forbearance under the CARES Act is still available to some homeowners. According to the Consumer Financial Protection Bureau, the rent and mortgage moratorium started during the COVID-19 pandemic and extended by President Biden has since come to a close. The Consumer Financial Protection Bureau (CFPB) notes that borrowers of “HUD/FHA, VA, USDA, Fannie Mae, and Freddie Mac mortgage loans” all qualified for up to eighteen months of forbearance during the pandemic.
However, most homeowners were required to apply for or receive initial forbearance by late September 2021 in order to qualify. Some borrowers could qualify for hardship forbearance after this deadline – particularly those with Fannie Mae, Freddie Mac or other government-backed loans. Check with a HUD-approved housing counselor or your mortgage lender for more information. An approved counselor — who should be able to discuss mortgage assistance options with the homeowner — is available for little or no cost.
Steps to Take Before You Miss a Payment
If robust enough to cover threats in your area — e.g. wildfires or floods — your homeowners’ insurance policy should protect you from owing your lender if a disaster occurs. However, homeowners’ insurance does not protect your property from foreclosure if you miss payments due to job loss, illness or injury. Homeowners can protect themselves from defaulting on their home loan in case of job loss, injury or illness by finding the right insurance policy. There are a variety of disability, job loss and mortgage protection insurance policies available — many of which are designed to help homeowners avoid foreclosure. Learn about job loss insurance and mortgage protection insurance below.
Job Loss Insurance
According to the resource “What to do if you lose your job” from State Farm, job loss insurance can “offer short-term financial support if a lost job means you need help paying a mortgage or other bills.” Homeowners who are suddenly out of work can even supplement their unemployment benefits — which are usually only a portion of lost wages — with funds paid by their job loss insurance company. Most insurance agencies who offer job loss insurance will only grant policies to those who are currently employed full-time. Few companies provide coverage if you quit or are fired from your full-time job.
In her article “Is Job Loss Insurance Worthwhile?” for The Balance Careers, Alison Doyle explains how these policies work in greater detail. According to Doyle, “most job loss policies have a waiting period of 60 days to six months before eligibility to receive benefits.” This period starts immediately after you have enrolled. As long as you meet the policy’s requirements, you will receive either a recurring monthly payment or a “lump sum payment.” There is usually a cap on the amount you can collect and the period over which you receive payments.
Mortgage Protection Insurance
In addition to disability insurance and job loss insurance, you might also consider a mortgage protection insurance policy to help pay your mortgage during a period of financial trouble. Mortgage protection insurance (MPI) is similar to both life insurance and disability insurance. In her article “Mortgage Protection Insurance Explained: Does Every Homeowner Need It?” for Rocket Mortgage, Victoria Araj explains. Araj writes that “MPI is a type of insurance policy that helps your family make your monthly mortgage payments if you – the policyholder and mortgage borrower – die before your mortgage is fully paid off.”
Certain companies that offer MPI policies might also provide “coverage for a limited time if you lose your job or become disabled after an accident.” Unlike traditional life insurance, MPI policies pay your mortgage lender directly instead of paying your family. Keep in mind that MPI payouts cannot be used to pay property taxes or HOA fees, and many companies “have strict limits on when you can buy a policy.” Typically, MPI companies require homeowners to apply for a policy within two to five years of closing.
DIME Life Insurance
Depending on their financial situation and employee benefits, certain homeowners might be better served by a DIME method life insurance policy than an MPI policy. In her article “Mortgage protection insurance: When you might need it” for Bankrate, Ellen Chang explains. Chang writes that homeowners can “get similar coverage” to a mortgage protection insurance plan “through a sufficient life insurance policy by using the DIME method.” DIME stands for “debt, income, mortgage, education.” The DIME method “takes into account your mortgage when you decide how much life insurance to purchase.”
What to Do If You Can’t Make Your Monthly Mortgage Payments
As mentioned above, homeowners miss monthly mortgage payments for many different reasons. Some are injured or fall ill. Others are faced with major damage to their property. Still others experience job loss or an unexpected reduction in earnings. Regardless of the reason why you cannot make your monthly payment, there are a few steps you can take to keep your home.
First, homeowners should get an idea of how long they will be unable to pay off their loan. In doing so, they should perform a complete budget analysis — taking all other debts, monthly payments and financial responsibilities into account. Next, they should contact their lender with this information in tow.
Homeowners might also consult with a lawyer or counselor who can advise them of their rights, explain their contract and outline government assistance programs. Your housing counselor and/or loan servicer might suggest a forbearance plan, loan modification, deed-in-lieu of foreclosure, refinance, additional loan — e.g. a home equity loan or personal loan –, repayment plan or short sale.
Depending on the extent of financial hardship, you might also qualify for government assistance. There are both federal and state programs available to homeowners in need of mortgage assistance. For example, the California Mortgage Relief Program helps homeowners in the Golden State make mortgage payments by drawing on the federal Homeowner Assistance Fund.
What Do I Do if I Lost My Job, Fell Ill or Became Injured?
Whether you lose your job, fall ill or become injured, the options for homeowners who cannot make monthly mortgage payments are fairly similar – especially now that most COVID-era allowances have expired. During the pandemic, the federal government issued a foreclosure and eviction moratorium. Some states and local governments extended this moratorium for property owners and renters who were still struggling because of the pandemic. Today, most assistance programs established during and because of the pandemic are no longer in effect. Thankfully, there are other options for homeowners struggling to make ends meet. From refinancing your house to asking your lender to modify your loan terms, follow below to learn about each option. Keep in mind that some of these options do not require involvement of your mortgage servicer.
One pathway to a lower monthly payment is to secure a new loan by refinancing your house. Of course, home refinancing takes time and might not be the right option for those who must act quickly in order to cover their house payments. Refinancing can also be expensive; it costs between 3 and 6% of the current home loan’s principal. Homeowners must also pay for a title search and other fees associated with loan origination. Refinancing probably will not help you or your family unless you have at least 20% equity in your home.
Quoting Lee Anne Adams – Senior VP of national initiatives at NeighborWorks America – in her March 2022 article “What to do if you can’t pay your mortgage” for The Washington Post, Michele Lerner elaborates. According to Adams, “refinancing may allow you to reduce your monthly mortgage payment, modify the interest rate or access equity in the home.” Homeowners can then use this equity to cover mortgage payments while unemployed or pay off medical bills incurred due to illness or injury. Unfortunately, refinancing might not be an option if you have already missed mortgage payments and those overdue payments appear on your credit report.
Forbearance or Special Forbearance (SFB)
Next on our list of mortgage assistance options is forbearance. In her article “What Happens If I Can’t Pay My Mortgage Anymore?” for The Balance, Miriam Caldwell defines forbearance and explains how it can help homeowners. Caldwell writes that a forbearance plan is an agreement between you and your lender that allows you to “make reduced payments, or sometimes no payments at all, for a period of time if you’re dealing with a temporary hardship.” As noted below, forbearance is common after natural disasters and some government programs actually require lenders to offer these periods of reduced or paused payments.
During the forbearance period, your lender will not pursue foreclosure. To qualify for forbearance, you will need to prove financial hardship. This could involve a forensic audit of your finances. Homeowners are required to cover all missed payments – and even some late fees – after this period ends. Sometimes, homeowners must deliver this amount in a lump sum payment to their lender. Other lenders offer payment plans.
If you recently lost your job and your mortgage is secured by the Federal Housing Administration (FHA), you might qualify for “special forbearance.” Special forbearance or SFB terms are typically longer than other forbearance periods because it is specifically designed for the unemployed. In her article “I lost my job, can I get help with my mortgage?” for NOLO, attorney Amy Loftsgordon explains. Loftsgordon writes that “an SFB could last one year, but there isn’t a maximum term limit.” Most special forbearance agreements are “followed by a payment schedule based on your ability to pay or another option that will cure the default.”
Loan modification is another common way homeowners seek relief during difficult times. If you already made a late mortgage payment and anticipate making additional late payments, consider contacting your lender about modification. In his article “7 Options if You Can’t Afford Your Mortgage Payments” for Experian, Jim Akin explains how mortgage modification works. According to Akin, “your mortgage lender permanently adjusts the terms of your loan to make your monthly payments more manageable” through modification.
If your lender agrees to a modification, they will probably extend your loan term “by several months.” This means that your mortgage will end up costing “more in interest payments than it did under the original payment schedule.” Unfortunately, lenders are not required to offer loan modifications to homeowners who stop paying their mortgages. Most lenders only offer modification to borrowers without other derogatory marks on their credit reports.
In addition to standard mortgage modification, there is also a government program that helps homeowners lower their payments. Shala Munroe explains in the article “What Happens to My House When I Lose My Job?” for SF Gate. Shala Munroe recommends asking your lender about the “government-backed Home Affordable Modification Program.” The Making Home Affordable program “examines your existing income and debt ratios to help you find an affordable payment.”
A repayment plan can also help homeowners catch up on missed payments. Most repayment plans allow you to make larger monthly payments after a brief period of hardship. Mortgage lenders rarely offer repayment plans to homeowners who have already entered the foreclosure process.
Renting Part or All of Your Home
If you rent our part or all of your home, you could make your monthly mortgage payments and settle into a repayment plan for any overdue payments. Of course, relocating and renting out one’s home is not always possible.
Homeowner Assistance Fund Programs
If you lose your job or experience a pay cut, be sure to check if your local or state government offers assistance through the Homeowner Assistance Fund Program. For example, if you make less than the area median income (AMI) for your county, you might qualify for assistance through the California Mortgage Relief Program. Learn more about the California Mortgage Relief Program here.
401(k) Hardship Withdrawal
Another option for unemployed, injured or ill homeowners who are unable to afford monthly mortgage payments is to withdraw money from their retirement accounts. While most account holders under 59 ½ years of age are penalized for withdrawing money before retirement, there are exceptions for holders who can demonstrate “hardship.” In his January 2022 article “IRA Hardship Withdrawal: How to Avoid Penalties” for SmartAsset, Javier Simon, CEPF® explains. Simon writes that the IRS allows you to avoid a 10% penalty tax to cover expenses like “unreimbursed medical expenses that exceed more than 7.5% of adjusted gross income,” “qualified higher education expenses” and “certain expenses if you’re a qualified military reservist called to active duty.”
Workers who are older than 55 years can withdraw funds from their retirement account without penalty even if they are fired from or quit their jobs. Other unemployed account holders can withdraw money as “substantially equal periodic payments” or SEPPs. Keep in mind that the IRS requires you to exhaust all other assets before you can legally claim a hardship withdrawal. Because withdrawing money from your retirement account is considered taxable income, your unemployment benefits could decrease.
Deed in Lieu of Foreclosure
If you miss enough payments and are unable to agree on a repayment plan, forbearance period, loan modification or other remedy, you might be forced to relinquish ownership of your property. A deed-in-lieu of foreclosure is when the borrower voluntarily relinquishes ownership of their home. By agreeing to a deed-in-lieu, your lender will forgive either part or all of your debt. This allows the borrower to avoid foreclosure proceedings and further hits to their credit.
Last on our list of options if you cannot afford to pay your mortgage is to pursue a short sale with your lender’s permission. In her article “What Should You Do if You Start Having a Hard Time Paying Your Mortgage?” for Money, Gabriella Cruz-Martinez explains how short-selling works and why homeowners consider this option. Cruz-Martinez notes that “a short sale isn’t a decision to take lightly since you’ll be giving up your home, but it can be preferable to foreclosure.” A short sale is when you sell your house for less than the balance of your mortgage because you cannot afford payments and/or repairs. Short sales are more likely in buyer’s markets when bidding wars are uncommon and sellers have less leverage.
If your lender agrees to the short sale, they might forgive your entire balance, or they might forgive part of your balance and require you to pay off the difference separately. According to Cruz-Martinez, “you won’t get any direct earnings from the short sale [but] you’ll save on the costly legal fees and related expenses of foreclosure.” A short-sale could still impact your credit report, however, so keep this in mind when weighing your options.
What if My Home Was Damaged or Destroyed in a Natural Disaster?
If your home was damaged or destroyed in a natural disaster, the right homeowner’s insurance policy should cover much of your rebuild and repair costs. It might even cover the cost of temporary housing. Homeowners insurance does not cover mortgage payments, however. To cover your mortgage payments after a natural disaster changes your personal finance situation, you might discuss loan modification and forbearance with your servicer. There are many resources available to homeowners who have been affected by a natural disaster that are not available to homeowners who have lost their jobs, fallen ill or sustained an injury.
For example, federally backed mortgages like those issued by the FHA, VA, Freddie Mac and Fannie Mae offer different ways to manage monthly payments after a disaster. In his article “Avoiding Foreclosure After A Natural Disaster” for Rocket Mortgage, Kevin Graham notes that “the response from the major mortgage investors is different for every situation,” but your lender should provide a list of options if you “reside in a declared disaster area.” Loan modification and forbearance are the most common ways lenders help borrowers who were affected by a natural disaster. Most federally-backed lenders will offer a 90-day suspension of foreclosure proceedings and defer or reduce loan payments after a natural disaster. In certain circumstances, the forbearance period could last six months or longer.
Disaster Relief Foreclosure Moratorium for Government-Backed Loans
VA Home Loans
Some federal agencies offer a standing foreclosure moratorium to disaster victims who are struggling to make their monthly mortgage payments. The VA does not require lenders to suspend foreclosure proceedings. However – according to the “Guidance on Natural Disasters” resource – the VA “encourages holders to establish a 90‐day moratorium on initiating new foreclosures” in disaster areas.
USDA Home Loans
On the other hand, the USDA requires lenders to suspend foreclosures after a natural disaster. According to USDA guidance outlined in the SFHGLP Handbook here, each loan servicer “must suspend all foreclosure actions for affected borrowers in PDD areas effective for 90 days from the date of declaration.” The SFHGLP Handbook notes that the foreclosure moratorium “applies to both the initiation of new foreclosures as well as foreclosures already in process.”
In specific instances, the USDA may require lenders to extend the initial moratorium or forbearance period. For example, the USDA extended moratoriums of property foreclosures in areas affected by Hurricane Harvey, Hurricane Irma and Hurricane Maria in 2018.
FHA Home Loans
The FHA also offers a moratorium to those who qualify. In their resource “Disaster Relief Options for FHA Homeowners,” the U.S. Department of Housing and Urban Development (HUD) notes that if you cannot pay your FHA-insured mortgage because of a natural disaster, you might qualify for a foreclosure moratorium. According to HUD, “you are automatically covered by a 90-day foreclosure moratorium…[if] you or your family live within the geographic boundaries of a Presidentially-declared disaster area.”
You will also qualify for the moratorium if “your financial ability to pay your mortgage debt was directly or substantially affected by a disaster” and are already delinquent. Those who were injured could qualify too. Keep in mind that homeowners who automatically qualify for the FHA’s foreclosure moratorium must still notify their lender.
Resources for Homeowners with Non-Government Loans
Unfortunately, homeowners with conventional mortgages might not be able to delay or reduce monthly mortgage payments after a natural disaster. Non-government lenders are not required to offer forbearance or loan modification to borrowers. The resource “Mortgage Hardship After Disaster” for civil legal aid law firm Community Legal Services of Mid-Florida (CLSMF) explains.
According to the CLSMF, relief for homeowners affected by disasters “will be left to the discretion of the owners and servicers of these mortgages.” However, lenders must still follow rules “issued by the Consumer Financial Protection Bureau (CFPB).” These rules protect borrowers from predatory behavior such as massive increases in future payments or significant extension of the original loan term.