During the current financial crisis, you may ponder the idea of simply stopping payment on your mortgage. It is an option that some may want to consider in difficult times, but it is a bad decision all the way around.
The reason: It will affect your credit for years to come and is likely to result in the loss of your home. As a topper, the bank doesn’t really wantyour house. Lenders are willing to help and would rather not foreclose.
So don't adopt the tactic of pooh-poohing your payment and hoping for the best.
According to the Mortgage Bankers Association, almost 7% of all mortgage loans are currently in forbearance as of April 19. That’s up from just under 6% the week before. To give some perspective, at the beginning of March, the number was just 0.25%. While some mortgage holders are asking for help, the temptation not to pay is real. Let's reiterate: It is a bad idea.
What happens if I don’t pay my mortgage?
If you don’t pay your mortgage, it will set you on the path to foreclosure, which means losing your house. A mortgage is a legal agreement in which you agree to pay a certain amount to a lender for a certain number of years. Failing to pay violates that agreement. Right now, federal (and some state) foreclosure proceedings are paused, but they will resume as soon as the economy begins to open up again. In some states, that may be imminent. The idea behind the pause was to ensure that people made it through the shelter-in-place orders with a place to shelter. “This is not a moratorium that [lenders] will never foreclose again,” says Mary Bell Carlson, an accredited financial counselor known as Chief Financial Mom. “You need to take this seriously and not just stop paying. Because if you stop paying and it adds up, you’re going to be first on the list to foreclose on when the economy reopens.” Consequences of missing payments Mortgage payments are due the first of each month and are considered late after the 15th of the month. That’s when late fees, penalties, and correspondence from the loan servicer begin. “First off, you’ll get a letter in the mail from your servicer which says you owe x amount and it must be paid by this date,” Carlson says. The letters will outline any penalties and late fees and will often include an offer of help. “The bank is not in the business of owning homes—that’s not what they want to do,” she says. “They’re not looking to take over your house." She adds that lenders want to work out solutions to keep you in your house and avoid lengthy foreclosure proceedings. Meanwhile, be wary if you receive a call or an email from someone saying they’re your lender and you haven’t paid. It's probably a scam, says Carlson. Your lender will send notifications via the postal service.
Will not paying my mortgage damage my credit score?
Your loan will go into default after 30 days of nonpayment. The mortgage servicer will probably file a notice of default with your local government and report the nonpayment to the credit bureaus, which will negatively impact your credit score. “The credit is the first thing that gets hit. Your credit will take a nosedive if you stop paying your mortgage,” Carlson says. “If you just close your eyes and stop paying, your credit is going to dissipate, and it takes years for those things to fall off.” A low credit score may impact your future ability to get a mortgage or to rent. “No one is going to want to rent to somebody who has just declared bankruptcy or has been foreclosed on, because that's going to be a huge red flag,” Carlson warns. As you continue to miss payments, penalties, interest, and correspondence from lenders will accumulate. Eventually, you'll get a notification that the foreclosure process is underway.
How long will it be before foreclosure?
The foreclosure process is different in each state, so the process and its length may vary. Carlson says the process often begins in earnest after about six months of nonpayment.
She added that from the time of the first missed payment to about the six-month mark, lenders will work on solutions to avoid foreclosure. But if they don't hear from you then, be prepared to lose your home.
“At the six-month point, they say, 'OK, all options are off the table at this point. You're unwilling to work with us, we're going to start foreclosure,'” says Carlson.
When this happens, the entire loan becomes due and repayment plans are no longer an option.
The timeframe varies by state, but sometimes as quickly as six months after the first missed payment, a lender can list the home for sale or hold an auction. A homeowner will have to vacate.
The current economic climate is delaying foreclosures, but proceedings will resume once states begin to lift suspension orders.
What do I do if I'm struggling to pay my mortgage?
If you're having difficulty making mortgage payments, there are options. Some will help keep you in your house, while others will protect some of your credit. But don't bury your head in the sand and simply stop paying.
“Communicating with your lender is the key,” Carlson advises. “So if you cannot pay, the communication methods need to—and must be—open to communicate that to your lender and discuss the options you have.”
Here are a few of the common options if you want to stay in your home:
Forbearance: A lender allows a borrower to pause payments for a period of temporary hardship, sometimes waiving late fees or penalties. Interest will often still accrue. At the end of the forbearance period, the missed payments become due. Forbearance is a good option if the financial situation is a short-term setback.
Loan modification: Changing the terms of the loan and payments is possible. Often, this involves a divorce, job change, or an unexpected increase in expenses. Loan modifications are a tactic to deploy if you want to stay in your home, but can no longer afford the current payments.
Repayment plan: If you are a few payments behind and think you can catch up, one option might be a repayment plan allowing you to make a lesser payment temporarily, until your finances are back on track.
Some alternatives if you don't want to stay in your home and would rather walk away:
Deed-in-lieu: In exchange for partial or total debt forgiveness, you voluntarily give ownership of the home back to the lender. This is usually when foreclosure is imminent, and you can no longer afford the payments and do not want to sell the property yourself.
Short sale: If you want to sell the home yourself and owe more than the home is worth, you could ask your lender if you could do a short sale. The property usually sells for less than the balance of the mortgage.
These options may hurt your credit, but not as badly as a foreclosure.
For more smart financial news and advice, head over to MarketWatch.
Tiffani Sherman is a Florida-based writer who covers real estate, finance, and travel.