Stay on track: How to prevent a default on a mortgage

Missed mortgage payments became far more familiar during the recent financial crisis. If your tight budget is forcing a decision about which payments you might have to skip, don’t give up and let the situation spiral out of control. Tight cash flow doesn’t mean you’re going to default on your mortgage.

The mortgage should, of course, be one of the last bills you let slide. Missing payments on such a large loan puts a major dent in your credit rating. However, if a missed payment looks inevitable, take heart. Most foreclosure proceedings don’t start until you’re about 90 days behind on payments, so you won’t be homeless one week after a missed payment. Stop to assess the situation and use the following steps to get back on track.

Call your lender before missing a payment

You can often explain your circumstances and appeal for permission to skip a payment (known as a forbearance) or otherwise modify the loan terms. “Bad things happen to good people. A lender understands that,” says Alan Stoltenberg, Vice President of Mortgage Lending at Cobalt CU. “Communicate with your lender earlier rather than later.” It’s rarely in lenders’ best interests to rush into a foreclosure, so they’ll usually work with you. Today’s lenders are far more proactive and flexible than in years gone by. So forget the old advice of missing payments to convince them your situation is serious.

Don’t assume all late payments are the same

Most payments are due on the 1st of the month but aren’t considered late until after the 15th. Paying between the 15th and 30th probably brings a penalty fee, but not a report to the credit agencies. Letting late payments pile up is a serious problem. “If one payment is missed, each subsequent payment will show as 30 days delinquent as well,” Alan says. “This will result in late charges that quickly add up and a continued decline of the borrower’s credit rating.”

Look for government assistance

If your financial struggle looks like more than a one-month shortfall, consider a couple of government programs created to help homeowners after the 2008 financial crisis. The HAMP program helps people facing foreclosure modify their loans. The HARP program helps people refinance their loan even when they’re saddled with a home that has decreased in value since they bought it.

Get expert advice

You can turn to nonprofit organizations for input on managing your situation, keeping your home, and keeping your financial situation in order. The Homeownership Preservation Foundation, which works with lenders and government agencies to help consumers not default on a mortgage, is one to try.

The bottom line is to take advantage of the help lenders and others are ready to offer. Being short on funds doesn’t automatically lead to ruin. Be proactive to avoid a mortgage default and get help if you need it.

What advice do you have about late or missed mortgage payments? Share in the comments.

If you do miss a mortgage payment, keep an eye on your other loan payments. Once word spreads to credit rating agencies that you missed a payment, your other creditors may raise your interest rate. Watch your loan terms and payment requirements for the next few months.