When Unemployment Mortgage Insurance Isn't Enough - What's Next?

Unemployment mortgage insurance can make your home loan payments, in the event you lose your job. Many people elect to get coverage in an economic downturn to protect themselves from foreclosure. This type of insurance can be a lifesaver in the short term, but it will rarely be able to cover an extended absence from work. Most policies extend for three to six months. If you lose your job in a very tough market, you could be out of work for some time.

Mortgage Deferral

One option to consider if you cannot afford your payments due to a change in your ability to pay is deferral. In deferral, you explain to your mortgage lender the situation that will cause you financial uncertainty. You will have to show you made a good faith effort to repay the debt in the past. Since you purchased unemployment mortgage insurance, your mortgage lender should be responsive to this argument. Finally, you will need to explain why the situation will continue for an indefinite period of time. If the mortgage company accepts your request for deferral, you can put off making payments for another three to six months, or even a year in some unique situations. You will likely owe interest only payments in the meantime. When the economy is slow, mortgage companies may be receptive to this option because they will be looking to avoid foreclosures at all costs.

Mortgage Assumption and Short Sale

You may simply feel selling your home is a better option than trying to stay and make payments in the future. Since unemployment typically coincides with an economic downturn, you may face a situation where your home's current assessed value is low. This can mean you owe more on your home than the potential sales price. Or, it can mean you will make a profit too small to allow you to move on to a new home in the near future. In both scenarios, short selling the home may be a solution. Your mortgage company can approve the short sale, which means you will stop making payments on your mortgage while your home is on the market. As soon as your home sells, the new buyer, if approved, can take over your mortgage, mitigating losses to both you and the lender.

Debt Settlement and Modification

You may be in a position where your ability to defer the loan has run out but you do not want to sell. In this case, consider taking a new mortgage to cover the remaining debt on the house. Pay off your existing loan with this sum. This is particularly useful if you have only a short time left on your existing loan. For example, if you have 15 years left on a 30-year mortgage, you can take a new loan to cover the remaining 15 years but set it on a new 30-year term. This will significantly reduce your monthly payments, allowing you to stay in the home even if you are earning a fraction of your previous salary.

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