What to Do When You Can't Pay the Mortgage in a Post Short-Sale World

By KC Hernandez ; Updated June 19, 2017
Couple calculating bills with calculator

Homeowners who can't pay their mortgage have options to avoid foreclosure. Depending on how long you expect your financial hardship to last, your mortgage lender may be able to temporarily or permanently lower your monthly payments. Short sales, in which a homeowner sells in spite of their home's negative equity, peaked during the Great Recession, but they have since become scarce. If you have fallen on hard times, or anticipate that you will get behind on your mortgage, making contact with your lender is the first step to finding out your options.

Your Mortgage Lender May Modify

A mortgage modification is one of the primary ways to stave off foreclosure and keep your home. It's also a permanent solution, ideal for borrowers who got stuck with a risky or unaffordable loan, or who have experienced a long-term financial setbacks, such as long-term disability. In a loan modification, your lender decides whether to restructure your loan via one or more of the following methods:

  • Interest rate reduction
  • Converting an adjustable rate to a fixed rate
  • Extending the repayment term

To qualify for a permanent modification, you must demonstrate that you can no longer keep up with your mortgage payments by providing income, asset and hardship details to the lender. You must also prove that you will be able to make the modified mortgage payments by completing a trial period of typically three months. Your mortgage lender will offer a proprietary modification program, which means the rules, process, and availability may differ from lender to lender. A modification is a negotiation between you and the lender. Offering a modification is up to lender discretion. Likewise, you don't have to accept an offer to modify your loan if you decide it's not right for you.

Forbear or Defer the Debt

Forbearance and deferment provide short-term relief for temporary financial hardship, such as job loss. They are also often precursors to a loan modification. During the forbearance period, which can last six months or more, your lender agrees to hold back on foreclosure proceedings, suspend or reduce your monthly payment, and allows you to repay the mortgage arrears at the end of the forbearance period to bring your loan current. The lender may hold off on charging you principal, interest, taxes and insurance during the forbearance plan. The length of the forbearance period offered varies by lender. The lender can choose to extend the plan if your financial situation doesn't improve by the end of your forbearance period. According to Homeownershop.org, you should request forbearance before you start to miss payments. Also, to get your mortgage current at the end of the forbearance period, you repay the lender in one of three ways:

  1. Reinstatement: a one-time lump sum payment of the skipped amount
  2. Repayment plan: increased monthly payments for a set time until amount is repaid
  3. Modification: waives the amount that would have needed to be repaid

Deferment slightly differs from forbearance, as the unpaid amount is tacked onto the loan's principal amount rather than repaid at the end of the deferment period. It can also be waived, according to Homeownership.org. A deferment is used when you are qualifying for a loan modification so that you don't have to make payments while you are in the process of modifying the loan.

Try a Refinancing Program

Your lender or a different lender can refinance your mortgage to a more affordable payment or more favorable loan program if you have sufficient credit, income and equity to qualify for the new loan amount. Usually, you must meet the lender's traditional guidelines for refinancing, but if you are a distressed homeowner, the Home Affordable Refinance Program, or HARP, allows you to refinance with more flexibility. For example, although you can't have more than one missed payment over the past 12 months and your loan must be current, you don't necessarily need a minimum credit score or an appraisal to get a HARP refinance. However, lenders that participate in HARP can, and often do, implement stricter requirement than HARP calls for, with many lenders requiring minimum credit scores and equity to refinance. Also, HARP only works on loans that were taken out prior to June 1, 2009 and backed by Fannie Mae or Freddie Mac.

Selling May Make More Sense

If you're too far behind to catch up with payments, even with the help of your lender, selling your home might be the best option for getting rid of the debt and getting back on your feet. The sale process can take anywhere from a few weeks to several months, depending on the demand in your area. In a good housing market, you can usually complete a sale in about 30 to 60 days. If you are behind on payments, your lender will require you to payback the balance, plus the arrears and late fees with the proceed of your home sale. You must also pay broker commissions if you are like most home sellers and use an agent to list, market and handle the paperwork for your home. Closing costs for a home sale typically total six percent to 10 percent of the home's sale price, according to Realtor.com. Therefore, even homeowners with little equity – less than 10 percent – can sell without having to come in with funds out-of-pocket.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.