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Missed Mortgage Payments Due to Government Furlough

government furlough mortgage paymentsWith President Trump and Democratic leaders at odds, the government shutdown has reached its fifth week; hundreds of thousands of government workers and contractors are impacted.

There are 800,000 federal workers and millions of federal contractors who aren't receiving paychecks during the shutdown. For all of these people, the likelihood of missing a mortgage or rent payment is becoming a very real possibility.

What a government furlough means for you

When a government shutdown occurs, whether it's a partial or full shutdown, hundreds of thousands of Americans are impacted by a furlough. Both federal workers and contract workers can be laid off, at least temporarily.

The good news is that most recent furloughs have seen government workers compensated in full for lost salary upon their reinstatement.

While it's likely that federal workers may be paid eventually, including back pay, there's no law that guarantees this. Sadly, the lack of any guarantee is even more impactful for government contractors.

Whether it's due to a furlough or an unforeseen event, many homeowners in the U.S. are facing the challenge of what to do when the money you typically have coming in to pay for your bills suddenly stops.

Home equity line of credit may help during furlough

It's estimated that 23 percent of Americans have little to no emergency savings in the bank.

Just ask the Whitworth family of Columbus, Georgia, who went through frightening times during the 2013 government shutdown, when Mr. Whitworth was furloughed. The Whitworth's were among that reported 23 percent without a nest egg.

According to Mrs. Whitworth, "After my husband was furloughed, we just didn't have the money to pay our bills. I did my research and thought that if we missed just one payment, we could get back on our feet and end up with a blemish or two on our credit."

After getting hit with late fees and falling behind on their payments, however, it turned out to be quite an uphill climb for the Whitworth family. "We could have easily lost our home had it not been for our Home Equity Line of Credit (HELOC). Luckily, we were able to essentially 'rob Peter to pay Paul' until we were back on our feet."

Whitworth goes on to say how fortunate they were to have available funds in their HELOC and still be within their draw period. "We essentially pulled just enough cash out from our 2nd mortgage in order to make the payment on our 1st mortgage. Since the interest rate on our HELOC was so low, combined with the flexibility of only needing to make a low interest only payment, it quite literally saved our home."

Since going through the frightening ordeal of almost losing their home, the Whitworth's have worked hard to get their credit scores back up, and even more importantly, they are now working on having a nest egg in place for emergencies.

Federal workers and contractors impacted by government shutdown

If you're one of the 800,000 government employees going without a regular paycheck, it could mean trouble when it comes to making your mortgage payment. According to recent estimates, federal workers affected by the shutdown have over $400 million in mortgage and rent payments due this month.

Beyond the 800,000 are the more than 4 million federal contractors who are caught in the cross-hairs.

Whether you work directly for the federal government or you're a contractor, you may face the possibility of making a late mortgage payment, or worse, missing the payment altogether.

The good news is you're not likely to lose your home after missing a single payment. In most cases, your mortgage servicer--the company that manages your loan--typically can't start foreclosure proceedings until you're 120 days behind on your mortgage loan.

That's not to say that there aren't certain circumstances where foreclosure can start sooner. Not to mention missing even one payment can lead to a downward spiral ending in foreclosure. Those who've been through tough times and missed mortgage payments can attest to the potential challenges faced after you start down that difficult path.

Whether the shutdown is causing you to be late, or miss a payment altogether, you should be proactive about contacting your mortgage loan servicer or landlord as soon as possible. Don't wait until your payment is late or missed. Doing so could limit your options, as well as damage your credit. Explain your situation and ask about alternatives. Rest assured that you aren't their first call about this dilemma.

Missed mortgage payments caused by government shutdown

The Office of Personnel Management (OPM) -- the agency that oversees the government's civilian workforce -- released official advice to furloughed employees. While the agency fell under scrutiny after suggesting federal employees should barter with their landlords if they can't make rent payments, they've since followed-up with guidance for impacted workers.

The agency also offers multiple sample letters that could be used to seek financial assistance. These letters include verbiage such as "As we discussed, I am a Federal employee who has recently been furloughed due to a lack of funding of my agency. Because of this, my income has been severely cut and I am unable to pay the entire cost of my monthly payment, along with my other expenses… I appreciate your willingness to work with me and your understanding during this difficult time."

The agency strongly recommends employees actually call and speak to their creditors, mortgage companies and landlords prior to sending a letter describing their situations.

According to the OPM, "Just sending a letter may not be very effective as it will take a fair amount of time to get the individual who needs to see it, if at all." OPM goes on to say, "Speaking with your creditors will enable you to work out the details of any payment plan that you can later confirm with your letter."

5 options if you're at risk of falling behind on mortgage or rent

If you don't have an emergency fund or enough cushion to get by, here are options to consider to help keep the roof over your head.

  1. Speak with your lender about forbearance. Forbearance is an arrangement designed to help homeowners during periods of financial hardship. This option temporarily reduces or suspends your mortgage payments while the money is short.
  2. Tap into a HELOC, if you have one available.
  3. Cut all unnecessary spending and talk to your creditors. Some creditors, such as your auto loan provider, may have provisions in place when there's temporary hardship cases. Even if they won't forgive the debt, some creditors may be willing to allow a delay in payment.
  4. Look at the possibility of cancelling subscription services, recurring home maintenance services and vacation travel--at least until the shutdown is over.
  5. Explore short-term, low-interest direct deposit loans. Some institutions offer "furlough" loans for clients who have their paychecks deposited directly into a checking or savings account.

Remember the importance of speaking with your lender, servicer or landlord as soon as possible. Do not wait until you're behind on payments. Lenders are much more inclined to work with you to waive late fees, set up repayment plans or offer loan forbearance if you are proactive and you explain your situation.

When renting, bear in mind that just because someone is a landlord it doesn't mean they're rich. More often than not, landlords rely on your timely rent payment to cover their mortgages and property costs. Landlords tend to be much more understanding though when they hear from you in advance.

Related: Navigating the mortgage process during the government shutdown

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