In Part I of this two-part series, we discussed the importance of assessing your options (both financial and emotional) if hefty mortgage payments are getting you down financially and mentally. But what if a tough-to-make payment becomes an impossible one? Is the only option foreclosure and the potential loss of your equity?

Hardly. One thing most lenders learned from the savings and loan debacle is that working with mortgage consumers is important for the long-term welfare of lending institutions and the economy. But it’s up to borrowers to proactively contact the lender and seek alternatives at the first sign payments fall behind. (It’s interesting to note that while most lenders are happy to talk with you at any time about your loan, some loan types won’t allow the lender to work out payment alternatives until the borrower has missed two payments in a row.)

But eventual alternatives are available to borrowers with late payments (depending on the type of loan and lender.) These could include making interest-only or partial payments for a time and/or adding late payments to the back of the loan term. When working out payment alternatives, it’s to your advantage to negotiate late fees and penalties that have accrued on delinquent amounts since they can easily total several months of additional mortgage payments added back into the loan. What if payments are several months behind before you contact the lender? Do you still have a chance at payment options? Yes, but based on the time that has elapsed (as well as the statutory time for foreclosure in your state) your options may be minimized.

Don’t forget that by this late date, it’s likely that the lender has sent you one or more “late” notices/letters, requesting that you contact them. Ignoring these notices may indicate to the lender that you really don’t take your obligations seriously and could limit work-out options on the mortgage.

Be prepared to share with the lender ways you could catch up the payments. This could include any wage increases you’re receiving soon, how you’ve restructured debt to ease cash flow, and/or other cash infusions you’re expecting soon (like an income tax return.) You and the lender are looking for a long-term fix to your payment problems---not a temporary one. So if a suggested repayment program won’t fit in your budget, be honest. Let the lender know what amount/time frame you can handle. If a meeting of the minds isn’t reached on catching up late payments now, you may be destined to repeat the delinquencies all over again. But next time, the options could be even more diminished.

What if late payments mount up and it’s clear that a borrower can’t extract himself from the situation? Is giving the property back to the lender a solution? Known as “a friendly foreclosure” the borrower gives the lender the property via a “deed in lieu of foreclosure”. This means that instead of a formal foreclosure on the courthouse steps, the lender agrees to take back the property (plus any equity held in it).

While this might sound like a fairly easy answer to a difficult problem, there are repercussions. First, the borrower’s credit is damaged and will remain as such for seven years (the statutory period adverse credit can remain on a credit report.) This makes it tough for the borrower to receive another mortgage since a deed in lieu of foreclosure carries nearly the same negative impact as a foreclosure. (This is one reason why bankruptcy is often suggested by some attorneys as a logical, viable alternative to mortgage foreclosure!)

Second, giving the property back to the lender should not be done before consulting with a real estate tax attorney since forgiven debt (the mortgage) may be viewed as a “taxable event” by the IRS. Depending on the circumstances, this could mean that even though the borrower no longer owns the property, he/she might be responsible for paying income tax on the forgiven debt. Ouch!

While financial binds can visit at any time, it’s what the mortgagor does with the problem that counts. Contacting the lender early, keeping in touch regarding payment options, and being committed to pay for the long haul are trademarks of the serious borrower. After all, it’s your home and you deserve to keep it.

Published: March 10, 2000

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Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.