Talk to your Lender: Sooner is better than later

By Jan Lindsey 
 

If you can’t make your mortgage payment, it is time to call your lender.

Whether you have lost income to a furlough or pay cut, or suffered an injury or illness that temporarily has you out of work, don’t wait until the lender is hunting you down to start a conversation. You should consider calling before you miss the first payment – think about it as soon as you realize you are headed for trouble. If you’ve already missed a payment, there is not time to lose. Start dialing.

This may seem counterintuitive. You may feel like you will be stirring up trouble where none yet exists. But the reality is that there are deals that can be struck and agreements that can be made at this early stage that won’t be available once the lender is in foreclosure mode. Foreclosure proceedings usually don’t begin until you have missed three payments.

It may take some time to reach your lender and work through all the details. But if it stabilizes your budget and puts you on a sound financial footing, it’s worth it. Right? So treat it like any other project and plan to spend some time and energy on it.  If you talk to the lender early enough, it is likely the lender will be willing to make some kind of accommodation to help you over your hurdle, said Jim Eberle, vice president of communications for the American Bankers Association. It costs them less to work with you than to foreclose.  “Nobody wins in a foreclosure,” he said. “There are some estimates that a lender would lose 40 percent to 50 percent in a foreclosure situation.

Most likely, a lender will try one of these options:

• extend your mortgage period – add months to the back end
•     of your loan to give you more time to pay
• reduce your interest rate
• reduce the principle owed
•  

And usually they will work down their option list in that order, Eberle said. The principal amount owed on a mortgage is rarely reduced.

You should not expect a lender to make any changes to your loan agreement, though, unless those changes will result in a more stable situation for everybody.  Any loan modification will be expected to remove the risk of a default.  You have gained nothing if your interest rate is reduced and you still can’t make the payment. And neither has your lender.

It is true, Eberle said, that some situations may be so bad they can’t be saved – such as when a borrower has a mortgage that will be too big no matter what changes are made to its terms. But don’t assume that is the case for you. “You’re always better off … trying to nip this in the bud,” Eberle said.