10 Options When You Can No Longer Afford Your Home
Life doesn’t always go as planned. You may be doing well financially, enjoying life and your day-to-day events, when hard times suddenly hit. You lose your job, your health fails, you experience a family crisis. Before you can adjust, you realize that it’s going to be impossible to pay your bills. What do you do?
If the worst were to happen, and we truly hope it doesn’t, the last thing you want to worry about is how you’re going to pay your mortgage. No matter how bad things get, remember that you always have options. Here are ten ways to ease financial pressure so you can get back on your feet and get life back to normal.
1. Communicate With Your Lender and the Consumer Financial Protection Bureau
The very first thing you should do when you realize that you’re not going to be able to make a mortgage payment is to contact your lender. A foreclosure isn’t in the best interest of your mortgage company, and most lenders aren’t anxious to add a foreclosure to the market. Your lender may work with you if your situation is temporary and you can show that you have a plan to pay in the not-too-distant future.
In 2016, the U.S. Consumer Financial Protection Bureau issued new regulations designed to protect struggling homeowners. You can contact the agency for free counseling, to learn your rights and for help developing a plan of action.
2. Consider Refinancing
If your situation is creating only a minor impact on your finances (for example, if you’ve found a new job, but one that pays less than your previous employment), refinancing may be a good option that could save enough money per month to cover the gap. Refinancing is taking out a new mortgage loan and using the money from the new loan to pay off your current mortgage. Refinancing is a fairly straightforward process, and even people who aren’t experiencing financial difficulty often take advantage of it.
But refinancing will only be an option if you haven’t yet missed a payment, and it will only solve the problem if you can either get a lower rate or a longer term. Also, keep in mind that, although you’re landing a lower monthly payment, you’ll likely pay more over time since you’ll be making payments for a longer period of time. There are also fees involved with refinancing, including closing costs. But if the math works out for you, it’s a fairly painless option.
3. Apply for a Loan Modification
If you’re not eligible to refinance, you may qualify for a loan modification. With this option, you and your mortgage company come to an agreement to change the original terms of your mortgage. You may be able to negotiate a new payment amount, interest rate, or other favorable change. To qualify, you must be facing a long-term hardship and be several months behind on your mortgage payments or likely to fall behind soon.
There are a variety of different programs, and those with Fannie Mae loans have the most options for loan modifications. Many homeowners will not qualify for one reason or another so you’ll need to get in touch with your mortgage company to see what’s available for your particular situation. Again, a Consumer Financial Protection Bureau can be an invaluable source of information as well.
4. If You Have an FHA Loan, File a Partial Claim
If you’ve missed between 4 and 12 payments on an FHA loan due to a temporary financial setback, you may be eligible for an interest-free HUD loan that will make your mortgage loan current. This partial claim is paid directly to your lender and places a lien on the property that’s then released after the loan has been repaid. To file a partial claim, contact your lender. Again, it’s a good idea to first speak with a Consumer Financial Protection Bureau counselor.
5. Sell Your Home on the Open Market
If you’ve determined that there’s no way you can keep your home, your best option may be to sell. Typically, you’ll get the most money from a sale on the open market — either through a realtor or for-sale-by-owner. But if you live in an area with a slow housing market at the time you need to sell, you may not be able to wait. And if your home is in extensive need of repair, you may not be able to find a buyer for your home as-is. There are also fees associated with selling your home on the open market, which may put this option out of reach.
6. Sell Your Home to a Cash Buyer
If you’ve tried selling on the open market without success, or if you know that the open market just isn’t an option for your situation, consider selling to a cash buyer. With a cash buyer, you avoid listing fees, commision expenses, and closing costs. The process is swift, meaning you’ll typically have the money within a few days. Cash sales are “as is” so you won’t have to spend any money or time making repairs or adding curb appeal to attract conventional buyers.
Watch out for unscrupulous investors who try to take advantage of those in unfortunate situations. Get an appraisal, if possible, to know what your home is worth, and look at comparables in your market. Know that you’ll get less from a cash buyer than from a conventional buyer on the open market, but there’s no need to accept less than you could get from a reputable cash buyer.
Be sure to protect yourself in a cash buying situation. Ask for proof of funds from your buyer before agreeing to anything. Don’t allow contingencies for inspection and appraisal if you’re agreeing to sell for a deep discount.
7. Apply for a Reverse Mortgage
If you’re age 62 or older and have equity in your home, you may be able to take advantage of a reverse mortgage. With a reverse mortgage, you can withdraw a lump sum or receive monthly payments against your home equity. The money is tax-free, and you don’t have to pay it back.
With a reverse mortgage, you’re still responsible for paying property tax and insurance, as well as closing costs on the loan. The main caveat of taking a reverse mortgage is that you’re eating up your equity and paying interest on the loan. However, depending on your individual situation, this may be an option worth considering.
8. If You’re “Under Water,” Consider a Deed in Lieu of Foreclosure
If your home is now valued at significantly less than the amount remaining on your mortgage, selling may not be an option for you. To avoid foreclosure, ask about a deed in lieu of foreclosure. Sometimes a lender will allow a borrower to sign the deed over to the mortgage company in lieu of payment. The homeowner is released from the mortgage, and the lender will then sell the home for as much as possible.
The advantage of a deed in lieu of foreclosure is that you don’t have to go through the painful foreclosure process, and it doesn’t impact your credit the same way that a foreclosure does. Note that a deed in lieu of foreclosure has tax implications, so you’ll want to consult with a Consumer Financial Protection Bureau counselor or a tax professional before taking this route.
9. Ask About a Short Sale
You have another option for selling if your home isn’t worth what you owe on your mortgage: the short sale. In this case, the lender agrees to let the borrower sell the home for less than they owe, and the buyer is released from the mortgage. Mortgage companies often don’t like this option, because the chances are that they’ll receive much less than what’s owed to them. But depending on the situation, the lender may determine that it is, in fact, in the best interest of their company. The advantages of a short sale are similar to the advantages of a deed in lieu of sale, and there are similar tax implications, which you’ll want to be aware of.
10. Rent Your Home
If you have another place to go and want to hold onto your home, consider renting it. The rent payments may cover your mortgage payments. If you’re able to rent out your home for more than your monthly payments, you could then turn around and rent a less-expensive home. While being a landlord is no picnic, you’ll be able to take tax-deductions on property taxes, repairs, operating expenses, depreciation, and mortgage interest.
Bankruptcy is always an option, but it’s smart to consider these other options first. Bankruptcy will send your credit score plummeting. If you file Chapter 13 bankruptcy, your score will remain too low to borrow any money for seven years. If you file Chapter 7, that timeframe will be extended to ten years. Bankruptcy can also affect your job prospects, if potential employers check your credit history. That said, there’s never a reason to lose hope. Even if you have to declare bankruptcy, you can work to rebuild your credit and get back on track.
Want to learn how the cash buying process works or how we work with our clients specifically? Give us a call at (864) 568-0435.