What Happens if You Can’t Make Mortgage Payments During a Recession?

What Happens if You Can't Make Mortgage Payments?

If you can't make your mortgage payments, your credit will take a hit, you could default on your loan and your lender may foreclose on your property. But don't panic just yet.

You typically need to be at least 30 days behind on your payments before it gets reported to the three consumer credit bureaus—Experian, TransUnion and Equifax. If you can make your payment within that window, you could avoid credit damage. The later your payment is, the greater the negative impact to your credit.

When Does Your Loan Go Into Default?

Your mortgage usually won't go into default as soon as you miss a payment. However, if you get to the 120-day mark without working out an alternate payment arrangement with your lender or loan servicer, the lender can typically start foreclosure proceedings.

The time it takes from the start of the foreclosure process until the lender can sell your home varies based on your state. If your lender completes the foreclosure process, it will show up on your credit reports (separately from the late payments) and can remain for seven years. However, the negative impact to your credit scores will wane over time.

Learn more: How Many Payments Can You Miss Before Foreclosure?

What to Do if You Can't Pay Your Mortgage

As soon as you realize you may not be able to make your mortgage payment, contact your mortgage servicer or lender. Companies that manage mortgages know that life can throw you a curveball at any time and are often willing to work with you to avoid late payments and foreclosure.

The sooner you reach out, the better. You may have more options if you get in touch before you miss a payment. Depending on your situation and the lender's or servicer's policies, you may have the following relief options.

Forbearance

Forbearance occurs when a mortgage lender or servicer temporarily suspends or reduces your payments for a specific period of time while you get your finances back on track. It doesn't change the amount you owe; interest may continue to accrue, and you must repay the paused payments. When and how you make the missed payments varies by lender.

Forbearance may be a good option if the setback you're experiencing is temporary, such as a job loss or emergency expense, but you expect to be back on solid financial ground within a few months. Lenders may offer up to a year of forbearance depending on your situation.

Loan Modification

A loan modification is a permanent change to your loan terms. It may involve reducing your interest rate, lowering the principal balance or extending the repayment timeline. If your lender agrees to a loan modification, it's crucial that you can afford the new payment going forward. Otherwise, you may find yourself struggling to make your payments again.

Loan modifications may make sense if you're experiencing longer-term financial troubles, such as a permanent reduction in income due to disability or divorce.

Learn more: How Can I Get a Mortgage Modification?

Repayment Plan

A repayment plan comes into play when you need to make up payments you've missed. That may mean adding payments to the end of your loan term or increasing your monthly payments for a set amount of time until you've repaid what you owe.

Your account may remain delinquent until you get caught up on your payments, and if your account isn't current before the lender is legally allowed to start foreclosure proceedings, you may lose your home.

Repayment plans are best for homeowners experiencing temporary hardships who will be able to pay previously owed amounts before foreclosure proceedings begin.

Refinance

If you're employed and have good credit, refinancing your existing mortgage could net you a lower monthly payment that's easier to manage, either by reducing your interest rate or extending the loan term. However, if you extend your loan term, you may pay more interest over the life of the loan.

You'll have the best chance of getting your application approved for a conventional mortgage refinance if you have credit scores of at least 620, but government-backed loan programs may accept lower scores.

Tip: Refinancing your home when you have late payments can be challenging, but it's not impossible. Find out about special refinance programs offered for conventional and government-backed loans and learn if you qualify.

Short Sale

A short sale occurs when you sell your home for less than what you owe, and the lender agrees to pay off your mortgage with the proceeds—even though it doesn't cover the remaining loan balance.

You need the lender's permission to complete a short sale, and in some states, you may need to get the lender to agree to waive the deficiency, which is the difference between what you owe and what you sell the house for, before starting the short sale process. Otherwise, the lender may be able to sue you for the deficiency amount.

Since you're selling your home, you'll have to find somewhere else to live if you opt for this strategy. The short sale will show up on your credit report and may remain there for seven years. You might need to wait up to four years after a short sale before applying for another mortgage. The amount of time you have to wait varies based on the reason for the short sale, loan type and lender.

A short sale may be a good option if the value of your house has decreased since you bought it and you need to move quickly or you're experiencing a permanent financial hardship that prevents you from paying your mortgage.

How to Prepare Your Finances for a Recession

Even if your finances are currently in good shape, it's a good idea to review them carefully to prepare for what may come.

• Review your spending habits. Now may be a good time to review your spending to distinguish between essential and nonessential expenses. Identifying areas where you may be able to cut back can help you prepare in case of a financial setback.
• Create or adjust your budget. If you don't have a budget, now's the time to create one. If you already have a budget, you may need to make some adjustments. If there are items you can eliminate or cut back on, this may be a good time to do so to free up cash you can use if you experience a financial hardship.
• Shore up your emergency fund. No one knows what the future may bring, but having a fully funded emergency fund can help you weather some of life's financial ups and downs. If you already have a solid emergency fund, consider adding a few more months of expenses to it to give yourself a larger financial cushion.

Learn more: Ways to Reduce Your Expenses

The Bottom Line

Not making your mortgage payments can result in serious consequences that can negatively affect your finances, credit and ability to get a loan in the future. But those consequences might not be inevitable. If you're struggling to make your payments, your lender may be willing to work with you to come up with an alternate arrangement that provides financial relief and allows you to keep your home.

That might mean suspending or reducing your monthly payments temporarily, permanently modifying your loan arrangement or refinancing your current mortgage. But it's important to act quickly. The sooner you take action, the more relief options you may have.