While you may have felt perfectly capable of making your mortgage payments when you bought your home, circumstances can change, and sometimes financial situations arise that impact your ability to make regular mortgage payments. Unexpected life events, such as job loss, medical emergencies, or significant increases in living expenses, can quickly strain your budget. This can have a negative impact on your credit score and put you at risk of losing your home if you don’t take immediate action. Failing to address the issue promptly may lead to more severe consequences, including the possibility of foreclosure or accumulating additional debt that could take years to recover from.
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?
Facing the reality of being unable to pay your mortgage can be overwhelming, but it’s important to remember that you are not alone, and there are steps you can take to address the situation. Financial difficulties can arise for a variety of reasons, such as job loss, unexpected medical expenses, or rising interest rates, and they can quickly impact your ability to keep up with regular payments. Taking prompt action is critical to minimize the consequences, such as damage to your credit score or the risk of foreclosure. Many lenders are willing to explore alternatives that could prevent foreclosure and keep you in your home, but the key is to act quickly before your situation worsens.
Here are a few things you need to know if you can’t pay your mortgage:
Determine the Reason You Can’t Pay the Mortgage
People do not fall behind on mortgage payments on purpose. Rather, there is an underlying reason that they can’t pay the mortgage. Once you figure out why you can’t pay your mortgage, 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 your mortgage payment may occur due to loss of income. Or, an emergency expense causes a budgetary shortage, forcing you to choose what gets paid in a given month. These situations often create a domino effect, leading to missed payments and late fees that compound the problem.
With that being said, long-term financial issues can make it difficult to make mortgage payments. Chronic financial instability, such as being underemployed or consistently earning less than your expenses, can result in sustained difficulty meeting mortgage obligations. You could be house-poor if you are putting an excessive portion of your income toward housing expenses, and even a small shift in your financial position puts you at risk. Maybe your mortgage is an acceptable portion of your household bills, but you have an excessive amount of other debt, such as a car loan, student loan or credit card debt.
Whatever the reason for falling behind, if you can figure out the underlying cause, you can start working toward a solution. Then, you can create a more sustainable financial plan and begin making progress toward catching up on missed payments.
Make Alternative Payment Arrangements
Regardless of the reason for a missed mortgage payment, many Canadian lenders will give a 15-day grace period. However, if that time has passed and you still haven’t paid, you may face late fees, take a hit to your credit score, or you could lose your home. The longer the delay, the more difficult it becomes to recover financially, as missed payments can lead to compounding interest charges and may ultimately result in foreclosure proceedings.
Before you reach this point, there are some options for catching up on that missed payment, including:
- 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 – 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.
No matter what, communicate openly with your lender about your financial situation as early as possible. Many mortgage lenders are willing to work with borrowers who show initiative in resolving their missed payments.
What If You Can’t Catch Up?
As previously noted, you will be charged a late fee once you have not made your mortgage payment after a little more than two weeks. After the 30-day mark, 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. While the process varies by province, the ultimate goal is to sell the property and use the proceeds to cover the amount owing. If the house sells for less than the remainder of the loan, you must pay the difference. This is called a deficiency judgment and requires additional legal action from your lender.
Although you might feel financially secure, sometimes unexpected situations arise, and you may ask, “What happens if I can’t pay my mortgage?” In this case, don’t wait until it is too late. If you have trouble, talk to your mortgage lender immediately 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.
