When you buy a home and take out a mortgage, you likely have every intention of making your payments on time and in full, but sometimes life has other plans.
In many cases, the financial difficulties that disrupt cash flow clear up almost as quickly as they arise, so it would be unfortunate to lose your single most valuable asset over a temporary financial setback. The worst possible thing you can do in this situation is to bury your head in the sand and hope that the problem will go away. It won't.
Thankfully, there are steps you can take to prevent this from happening. The strategies listed below will help ensure that, should you fall behind on your mortgage payments, you can avoid the worst-case scenario: a mortgage default, power of sale or foreclosure.
Step 1: Speak with your lender (right away)
As soon as you see financial difficulties on the horizon, start an open dialogue with your lender. The worst thing you can do is avoid the conversation and hope your financial problems will go away, so don't sit and wait for your lender to contact you.
The sooner you let them know, the better, at least before you receive a demand letter. That's because there could be more options available to you to bring your mortgage into good standing and avoid serious damage to your credit score.
They will also be more likely to work with you if you can show that the issue will be temporary and that you're making every effort to resolve it quickly. Remember that the last thing your lender wants to do is go through the expense and hassle of a power of sale or foreclosure, so allow them the chance to work with you.
Step 2: Call your mortgage broker
It also helps to get in touch with your mortgage broker. Review your financial situation with your mortgage broker and ask for a breakdown of your options to avoid defaulting on your mortgage.
It often helps to provide your broker with a list of your debt obligations. These may include credit cards, car loans, utilities or lines of credit owing, along with the due date for each. Also, prepare information about your current financial circumstances, such as your income, savings, investments and other assets.
Keep your mortgage broker in the conversation as you work through the issue. Let them know when your situation changes for the better or worse.
Step 3: Contact a real estate lawyer or bankruptcy trustee
If you know this is more than a temporary issue, you'll want to contact your real estate lawyer or bankruptcy trustee, in addition to your lender and broker. These professionals should be able to provide the options available to you in the event of long-term financial constraints.
Keep in mind that filing for bankruptcy isn't the only option. Depending on the province in which you reside, you may be able to file a consumer proposal or negotiate another financial arrangement with your lender that will help pave the way for better days down the road.
What are my financial options?
Restructure your mortgage.
You want to keep your home, and the lender wants to keep getting payments. To keep everybody happy, your lender might consider restructuring your mortgage.
There's a good chance you'll have to pay a mortgage penalty to make any changes (unless you happen to be coming up on your renewal date), but if it keeps you in your house and keeps your good credit score intact, then it may be worth it.
For example, this step may allow you to extend your amortization period, which will lower your mortgage payments. Another option is to take the total amount of the mortgage payments you've missed and add this to your remaining mortgage balance. Doing this will spread the payments you owe over the remaining mortgage payment period so that you essentially have more time to pay back your lender. If you've made prepayments on your mortgage in the past, some lenders will even let you skip a payment or two because you were ahead of schedule before your current financial challenges.
It's also worth noting that if you've set up your mortgage with inflated payments as a strategy to cut down on interest and pay your mortgage off faster, you can always reduce this number back down to the minimum, and you don't have to pay a penalty to do so.
If your lender isn't willing to work with you, your mortgage broker might be able to find another lender who will. Just understand that you'll likely have to pay a higher interest rate, especially if it's with an alternative lender.
Consolidate your debt
If you're considering restructuring or refinancing your mortgage, you could also take that opportunity to consolidate your outstanding debt. This option may be ideal if your other monthly debt obligations make it difficult to make your mortgage payments.
Consolidation means that if you refinance your mortgage, you can choose to roll your existing debt, such as car loans, credit card balances or lines of credit, into your mortgage. Of all types of debt, mortgage debt tends to come with the lowest interest rates, so the benefit of this strategy is that you'll more than likely pay less overall in interest, reducing the strain on your cash flow. This may also help you manage stress because you'll have only one debt payment to consider.
As mentioned, breaking your mortgage for debt consolidation still requires you to pay a penalty, so speak with your mortgage broker to see if the benefits outweigh the costs.
Rent out your place
If you have an in-law suite in your basement you're using for storage, consider renting it out to tenants. The extra income can help you make your mortgage payments.
Don't have an apartment in your basement? The sharing economy has made it easier than ever to earn income from unused space in your home. Through home-sharing sites like Airbnb, you can rent out a spare bedroom, and you can do it on a schedule that works for you.
If you're in an apartment building or condo, make sure your building manager or strata rules allow you to rent out part of your place, as you don't want to incur additional risk or fines as a result.
Get help from family
You don't know until you ask. If your family is able to help you out financially, they may be willing to loan or gift you some money to help you stay afloat.
Tell them the whole story, be honest and open about your situation, and come to them with a clear repayment plan. You may be surprised by the response.
Sell your home
If all else fails, you may have no choice but to sell your home. Whether you choose to rent for a while or to purchase a property that requires a smaller mortgage, you'll free up more of your monthly cash flow to alleviate your current stresses.
Although this likely isn't your first choice, it's better to choose to sell your home than to wait for your lender to make that choice for you. You'll avoid a power of sale or foreclosure, and you'll protect your credit rating from further damage.
When your lender sells through a power of sale or foreclosure, they may be willing to accept a lower offer than you would, so deciding to sell may also leave you with more equity at the end of the day.
Planning for financial difficulties
The best way to avoid falling behind on your mortgage payments is to plan for financial difficulties ahead of time. Of course, we began this article by talking about sudden life changes and unanticipated challenges, so how do you prepare for something that you don't expect to happen?
The truth is that you may not be able to predict the future, but you can still make your financial stability more resilient by taking specific proactive steps.
Firstly, when buying a home, stress test your finances. You'll have to go through a stress test when applying for a mortgage, but it's best to create your own as well. Consider some of the expensive potential costs that could arise, like major home repairs, and map out how they would affect your finances. Run a scenario where you lose your job or your income is interrupted for a time. Do you have savings to maintain your lifestyle? Do you have a line of credit that could help cover short-term costs?
Most financial experts recommend having an emergency fund of three to six months' living expenses stashed away in a high-interest savings account. I know that's a lot of money for a cash-strapped first-time homebuyer, but you don't need to come up with it all at once. By putting aside an extra $50 per month, you'll accelerate emergency fund savings over time. You may not miss the $50, but you will appreciate having the money handy when it prevents you from missing mortgage payments or going into debt.
Secondly, don't stretch yourself too thin financially. The lender qualifying guidelines assess whether or not your income is sufficient to cover your mortgage payments, home insurance, heating, condo fees (if applicable) and other debt obligations. But they won't factor in childcare expenses or job loss. So just because you can borrow the money doesn't mean you can afford it.
In other words, it's best to avoid buying too much house. Just because your lender says you can spend $800,000 on a home doesn't mean you should. You may be able to find a home for $650,000 with everything you want by looking in a lower-priced area. The lower mortgage payment will give you some much-needed financial breathing room if you run into financial difficulties later on.
Although it can be tempting to use high-interest debt, such as credit cards and payday loans to get you through tough financial times, do everything you can to avoid them. It compounds your issues, creating a much worse downward spiral.
Plan proactively, leave yourself a cash flow buffer, and come up with long-term solutions should you run into trouble, especially if your financial difficulties won't be going away anytime soon.
Hopefully, you'll never find yourself in the situation of not being able to pay your mortgage, but if you do, you can be prepared, familiar with your options, and you can implement a game plan that gets you through more or less unscathed.