Even the shiniest silver spoon and the very best intentions aren’t enough to guarantee immunity from financial problems, because, well, sh*t happens. And while you can’t control all the variables that can lead to hard times, you can have command over your response, which, ideally, should look more like a plan than panic.
To help you expect the unexpected, we’ve outlined three of the top reasons that people might find themselves behind on their mortgage (or any bill, really), along with ways to deal. You might find that a little foresight allows you to have peace of mind in the present, while also helping you avoid hard times in the future.
1. They forget.
If you’ve never experienced that dreaded heart-in-your-stomach feeling that accompanies the realization that you overlooked a due date, hats off to you. Unfortunately for the rest of us, that sensation is one we’ve all had to endure at least once. In fact, according to the 2018 Consumer Financial Literacy Survey conducted by the National Foundation for Credit Counseling (NFCC), 25 percent of the participants admitted they don’t pay their bills on time, while 8 percent reported having accounts in collections (a long outstanding unpaid bill).
Because a mortgage is considered a secured debt—that is, a debt that you put collateral (read: your home) against to reduce the lending risk—it’s crucial that the payment is made on time every month. The alternative could not only mean late fees (usually 4 to 5 percent of the overdue amount) and a big hit to your credit score, but also the foreclosure of your property. Guidelines vary by state, but lenders typically initiate the foreclosure process around the 120-day-late mark. In other words, your lender isn’t messing around, and neither should you.
How to deal:
Your first line of defense could be to enlist the help of a personal finance app like Mint or Prism. Not only can these services (many of them free) help with budgeting and bill tracking, they’ll also send you a heads up when your mortgage payment is nearing its due date . If you find that no amount of email reminders, app notifications, or big red circles on a calendar will ever be enough to spur you into action, then opt for automatic recurring payments via your mortgage company’s website. Of course, you’ll want to make sure that you have sufficient funds in your account to cover the payments, and it’s also a good idea to regularly peek at your statement to stay in the loop about your loan.
2. They don’t have the money.
Get this: According to the NFCC survey, 24 percent of the participants struggling to minimize their debt said it was incurred due to "unexpected financial emergencies." Data aside, it’s safe to say that a sudden decrease in income or increase in expenses can easily send a person’s finances into a tailspin, whether due to a job loss, medical issue, bad investment, or something else altogether. And if you don’t have a rainy-day fund set aside, things can go from bad to worse very quickly.
How to deal:
To ensure you’ll be able to pay your mortgage, keep your savings account padded with at least two months’ worth of reserves (enough to pay your principal, interest, taxes, and insurance twice over), although six months’ worth would be preferable, advises Holden Lewis, NerdWallet’s mortgage expert. Have the funds saved in a place where you can access it "easily and quickly," he says (read: not in your 401K). Since it can be hard to save after you get the mortgage, try to have this stockpiled before you buy your home.
If you simply don’t have the cash to make your payment, give your mortgage servicer a call—sooner than later—to discuss options that could help you avoid foreclosure. A loan modification or a refinance are both solid options to look into. If you go the refinancing route, see if you are a good candidate for a cash-out refi, which would enable you to turn some of your home’s equity into cash to be used to pay down your debts. The Consumer Financial Protection Bureau (CFPB) also suggests reaching out to a housing counselor from the Department of Housing and Urban Development for added guidance. Victim of a natural disaster or other emergency out of your control? Contact the Federal Emergency Management Agency (FEMA), your insurance company, and your mortgage servicer. "Do this if the disaster interrupts your income, even if your home isn’t severely damaged," Lewis says.
3. They have trouble prioritizing their bills.
Imagine being faced with a laundry list of bills ranging from $20 to $2,000. When money is really tight, you might be tempted to pay the $20 bill first since it’s a more manageable amount and, psychologically, it might allow you some much-needed catharsis to have paid a bill in full. Or think about all those little indulgences (dining out, brand-name products, coffee shop lattes, etc.) that don’t cost too much on their own, but can easily add up to hundreds. These are just two habits that can put a limited monthly budget in the red, rather insidiously.
How to deal:
First and foremost, if you feel you’re at fault for making a big purchase that was really more of a want than a need (it happens), commit to drawing the line between necessities and everything else, and be willing to go without a few niceties until you’re back on your feet. Then, create a payment hierarchy to help you tackle your bills in an organized, strategic manner. Your mortgage should take top priority, despite the fact that it’ll be scary to see such a huge chunk of your budget disappear in a single transaction. Next in line are your remaining basic essentials: food, utilities, transportation, and health insurance, followed by unsecured debts (i.e, debts not backed by collateral) such as credit cards and health bills.
While you’re prioritizing your other bills, keep in mind what will happen in the future if you decide to skip a payment now: Being 30 days late on a credit card will cause your credit score to take a nosedive, but good spending habits will help it recover over time. Being 30 days late on a mortgage, on the other hand, could end up becoming a big hurdle should you wish to initiate the loan process again in the future.