What to do if Your Mortgage is in Default

If you are more than 30 days behind on your mortgage payments, your loan is in default, and you have probably been receiving friendly - or not so friendly - reminders to bring your loan current. At this point, you still have a good chance of keeping your house, because your lender doesn't really want it. Foreclosures cost lenders money.

Once you are 90 days behind on payments, your lender will likely start foreclosure proceedings. You will receive a formal letter notifying you of the default and giving you a few days to make all back payments, including late fees and penalties.

Talk to Your Lender

Don't let things get to the point where you get that letter. As soon as you know you are going to have trouble paying, even before missing the first payment, call your lender. If your inability to pay is a temporary situation, you may be able to set up a payment plan to bring your loan current over time.

Ask About the Home Affordable Modification Program (HAMP)

This government program allows some homeowners to refinance their loans even if they are in default. You may qualify if you meet the following requirements:

• Provable financial hardship that makes it impossible to afford current payments
• A mortgage payment that is more than 31 percent of pre-tax income
• Loan origination no later than January 1, 2009
• A loan balance on a single-family residence of no more than $729,750

Those who qualify will receive a three-month trial loan modification. Any trial modification made starting June 1, 2010, is guaranteed to become permanent as long as you make trial payments as scheduled.

Other Options

If you cannot qualify for a payment plan or for HAMP, you may not be able to avoid losing your home, but there are options other than foreclosure. These include:

• Short Sale: In a short sale, the lender allows you to sell your home for less than your loan balance and forgives the difference. Before agreeing to this, ask your lender to report your debt as paid in full or paid satisfactorily. Any report indicating settlement for less than the amount due will negatively affect your credit score.

• Deed-in-lieu of Foreclosure: Your lender may forego a foreclosure process if you simply hand over the deed to the house. You cannot do this if you have a second mortgage, unless the same company holds both liens. But some companies like CitiMortgage will let certain homeowners stay in the home for six months without making further mortgage payments, as long as they sign over the deed and continue to maintain the property. 

• Bankruptcy: Sometimes filing for bankruptcy can halt foreclosure proceedings. It can also restructure or wipe out other debts, increasing your ability to afford your mortgage payments. However, bankruptcy also usually has a more negative effect on your credit score than foreclosure.

Get Counseling

The federal government's Homeowner Affordability and Stability Plan helps troubled homeowners avoid foreclosure. Contact the Department of Housing and Urban Development to find an approved counselor, available at no charge. A trained counselor can help you evaluate your options and make sensible decisions in the face of overwhelming anxiety. It’s important to get help before the bank has started foreclosure proceedings whenever possible.

You may also find counselors through the Homeownership Preservation Foundation (HPF), a non-profit that helps consumers navigate the loan modification process, or The National Foundation for Credit Counseling. Do not trust any company that guarantees a loan modification or asks for an upfront fee.