While you might have felt perfectly capable of making mortgage payments when you bought your house, sometimes financial situations arise that affect your ability to make regular mortgage payments. This can have a huge negative impact on your credit score and can put your home in danger of being repossessed if you don’t take immediate action. Luckily there are options that can give you time to turn your finances around. Here’s what you should do if you can’t pay your mortgage.
What Happens If I Can’t Pay My Mortgage
Determine the Reason You Can’t Pay
In most cases, people do not fall behind on mortgage payments on purpose. Rather, there is an underlying reason that you can’t afford to make your mortgage payments. Once you figure out why you can’t pay your mortgage, then you can take steps to remedy the situation.
In some cases, short-term financial issues make it difficult to make mortgage payments. Falling behind on mortgage payments could occur due to loss of income, as many Canadians experienced during the Covid-19 pandemic. Or sometimes, an emergency expense causes a budgetary shortage, forcing you to pick and choose what gets paid in a given month.
In other cases, long-term financial issues make it difficult to make mortgage payments. If you pay an excessive portion of your income, making you house poor, then you might be in constant danger of not being able to make your mortgage payments. Or your mortgage is an acceptable portion of your household bills, but you have an excessive amount of other debt like vehicle loans or credit card debt.
Whatever the reason for falling behind, if you can figure out the underlying cause, you can start working on correcting it.
Make Alternative Payment Arrangements
Regardless of why you can’t make your mortgage payment, once 15 days have passed, you will be charged a late fee. Those 15 days are a grace period, so if you pay your mortgage before the days have elapsed, you will typically not be charged any fees or penalties. At this point, you have a few options for catching up:
Short-term mortgage payment deferral – If you are dealing with a temporary setback, then deferring your mortgage for a set amount of time could be a good option. This allows you to repay the missed payments later, plus any interest accrued over the deferral period.
Make reduced payments – A forbearance plan allows you to make reduced payments or sometimes no payments for a set amount of time. This is another good option if you are dealing with a temporary setback.
Extend the original repayment period (amortization) – Extending the amortization period could lower your monthly mortgage payments and make them more affordable.
Add the missed payments (arrears) to the mortgage balance – Your mortgage lender might be willing and able to add the missing payments to your mortgage balance and spread them out over the remainder of your mortgage period, thus increasing the mortgage amount for the rest of the term.
What If You Can’t Catch Up?
Once 15 days have passed without you making your mortgage payment, there will be a late fee, and after 30 days, your loan will officially default. At this point, your lender will report your overdue payment to credit bureaus, which will begin to impact your credit score.
The foreclosure process will begin if 120 days have passed and you still have not made a mortgage payment or any alternative arrangements. When your home is foreclosed on, your mortgage lender will take possession of your home and remove you from the property. While the process varies by province, the ultimate goal is to sell the property and use the proceeds to pay off the remainder of the mortgage.
If the house sells for less than the remainder of the loan, you will be required to pay the difference. This is called a deficiency judgement and requires additional legal action from your lender.
Although you might feel financially secure, sometimes unexpected situations arise and you may find yourself asking, “What happens if I can’t pay my mortgage?” In this cases, don’t wait until it is too late. If you think you might have trouble, talk to your mortgage lender right away to work out a plan. They are much more willing to help you if you approach them ahead of time rather than letting your mortgage default. If your finances are sound at the moment, then use the opportunity to build an emergency fund, should you run into financial trouble in the future.