We know the scenario: Maybe your spouse lost a job, dropping your household income. Maybe your hours at work have been cut. Or maybe your own job has disappeared. Whatever the financial emergency, your monthly mortgage payment has become unaffordable.
What can you do if you want to keep your house? There are steps you can take to relieve your burden. But be warned: Most of them involved a sacrifice on your part.
"Being faced with the threat of losing your home can force you to make some real serious financial decisions," said Kyle Winkfield, president and chief executive officer of the Winkfield Group, a financial planning firm in Rockville, Maryland. "There are few things that can keep you as focused on how you are spending your money."
Here are four possible strategies to keep your home when that mortgage payment becomes too much of a financial burden.
1. Bring in a Tenant
Rent a room and reduce your expenses. Do you have an extra room in your home? Maybe you have a finished basement that you rarely use. Depending on your municipality's regulations, you might be able to rent out that room. If you're fortunate, that extra income can be enough to help you cover your mortgage payment.
Be sure to check with your local government first. You don't want to violate any local ordinances by renting out that extra room on the third floor of your home.
If renting a room isn't an option, look carefully at your monthly expenses. Is there anything you can cut to provide some extra dollars for your mortgage payment? You might consider eliminating cable TV subscriptions or gym memberships. Maybe you can cut out restaurant meals and trips to the local movie theater.
"Taking a hard look at your budget might be more productive than you think," Winkfield said. "Depending on how much of a burden that mortgage payment is, you might save enough each month to be able to keep your home until you can somehow boost your income."
2. Find Part-Time Work
This isn't always ideal, but maybe you can find a second part-time job to bring in enough extra income to help reduce the burden of your monthly mortgage payment.
You don't want to spend all of your time at work, and holding down two jobs can be stressful. But so can losing your home to foreclosure. If a second job can help you cobble together enough income to cover your mortgage each month, sign up, and hold that part-time job until you can overcome whatever financial crisis damaged your household budget.
3. Modify Your Mortgage
As soon as you notice that you are struggling to pay your mortgage, call your lender. This can be embarrassing, but it's a necessary step. Ask for help. Ask for a loan modification.
In a loan modification, your lender can take several steps to reduce the size of your monthly mortgage payment. It can decrease your loan's interest rate, forgive a portion of your principal balance, or extend the term — the number of years you have to pay back your loan — of your mortgage. All of these steps will result in a lower mortgage payment.
Be warned, though, that your lender doesn't have to accept your request for a loan modification. You must first offer proof that you have suffered a financial hardship. This can be in the form of bank account statements showing a drop in available funds, paycheck stubs showing that your monthly income has plummeted, or medical bills showing how much you owe because of a recent illness and injury.
You must also have the right household income. This can be tricky. Winkfield says that if you earn too much money each month, your lender will deny your modification request because it thinks that you make enough to pay your mortgage. But if you make too little money, your bank will deny your modification request because even after it modifies your loan, you still won't have enough funds to cover your monthly payment.
Finding that sweet spot in the middle? That's no easy task.
4. Declare Chapter 13 Bankruptcy
You might be able to keep your home by declaring Chapter 13 bankruptcy protection. But Winkfield says that this should be a last resort. Declaring bankruptcy can hurt your credit score by more than 100 points. And a Chapter 13 bankruptcy filing sits on your credit report for seven years, making it a challenge to qualify for a new mortgage loan or any form of credit.
"This should only be used if you have absolutely no other option," Winkfield said.
In a Chapter 13 bankruptcy, a bankruptcy judge drafts a payment plan that allows you to pay back your creditors on a schedule that you can afford. This plan will include more affordable payments to your mortgage lender each month. You'll also get to keep your home.
You might also file for Chapter 7 bankruptcy, in which some or all of your debts are permanently wiped out. But this form of bankruptcy protection comes at a steeper price. First, it remains on your credit report for 10 years. Secondly, you might have to sell your home, and other assets, anyway as part of your bankruptcy agreement.
Being unable to cover your mortgage is stressful. But being proactive and budgeting creatively can maximize your chances of keeping your home.