4 Things To Know About Defaulting on Your Mortgage

Many Americans dream of owning a home. Most don’t have cash to buy outright. They make a down payment and borrow the rest from a mortgage lender. Mortgage debt is one of the largest debts Americans take on. Sometimes, hard-working borrowers default on their mortgages. Taking on a mortgage isn’t an easy burden to bear.

What Is a Mortgage Default and How Does It Happen?

Borrowers who need money to purchase a home must apply for a mortgage loan. You’ll have to provide your lender with financial information. The lender determines whether you can afford the monthly mortgage payments.

When the lender approves your loan, you’ll sign the mortgage document. You acknowledge that you agree to the contract terms. The mortgage document will specify when a default occurs. The contract will also state the lender’s rights if you default.

Typically, a mortgage default occurs when you:

• Miss mortgage payments
• Fail to pay real estate taxes
• Fail to pay for homeowner’s insurance
• Transfer the title without lender consent

Default terms vary depending on loan type and mortgage contract.

During the 2008 financial crisis, mortgage default rates soared. Mortgage lenders had approved loans for people who couldn’t afford payments. Some lenders didn’t even require financial documents during origination. As a result, many borrowers lost their homes to foreclosure.

Unlike a credit card, mortgage payments are secured by your home. If you fail to make payments, the lender can foreclose. They can sell your home to satisfy the loan balance. By contrast, missing a credit card payment doesn’t put your home at risk.

What Happens if I Default on My Mortgage?

Borrowers who default face various fees. These fees add up quickly. The default may hurt your credit score. You’re also at risk of losing your home.

The mortgage servicer will charge you a late fee if payment is late. On top of late fees, you may be charged default-related fees. These include property inspections, maintenance expenses, and foreclosure costs.

The mortgage servicer will notify the three credit bureaus. You missed payments on your mortgage. Even one late payment can affect your credit score. Checking your mortgage account is important. Make sure you’re not being charged incorrect fees. You’ll receive notice from the servicer if you miss a payment.

If you miss several payments, the servicer may notify you. They intend to accelerate the loan unless you catch up. Under the mortgage terms, if you’re in default, the lender can accelerate. They can call the total loan amount due. Once accelerated, they’ll likely start a foreclosure lawsuit. They will sell your home.

Typically, lenders wait until you miss four payments before acceleration. The number may change depending on the lender. The housing market also affects timing. If courts are backlogged with foreclosures, lenders may wait longer.

Time-Frame of Mortgage Default

• The mortgage contract usually gives you a 15-day grace period. If you pay within this time, you’re fine. If not, you’ll be charged a late fee. Credit bureaus may be notified.
• After a second missed payment, the loan is delinquent. Depending on your loan terms, you may be in default.
• A letter will be sent giving you 30 days. Make up the missed payments or face acceleration.
• After 30 days, you’ll face acceleration and potentially foreclosure.

What Is a Foreclosure?

The foreclosure process varies from state to state. The lender seeks to sell your home. Sale proceeds satisfy the outstanding balance. Under federal law, lenders must wait 120 days before foreclosing.

In some states, the foreclosure process is judicial. A lawsuit must be started before foreclosure. Other states recognize non-judicial foreclosures. The mortgage document gives the lender power to sell without a lawsuit. If the lender succeeds, they will sell your home at auction.

If the foreclosure sale price is less than you owe, problems arise. You owe the loan amount plus late fees, interest, attorney fees, and sale costs. The mortgage lender can sue you for the remainder. This is called a deficiency balance. Having a deficiency balance can lower your credit score significantly. It may result in wage garnishment to collect the deficiency judgment.

How To Avoid a Mortgage Default

Borrowers looking to avoid default should talk to their loan servicer. Discuss your options after experiencing a financial hardship. Figure out if your financial issue is short-term or long-term. This will affect your best options to avoid defaulting. The following approaches may be worth considering:

Forbearance Agreements

If you’re having short-term money issues, forbearance may help you avoid foreclosure. A forbearance agreement is between you and the lender. The lender agrees to pause your mortgage payment obligation. Or they reduce the payment amount for a short time. The period is usually three to six months.

During this time, the lender agrees to forbear its foreclosure rights. At the end of forbearance, you must make up missed payments. You’ll also need to keep up with regular mortgage payments. You’ll need to enter into a repayment plan with the servicer. The repayment period may vary depending on the lender. They may require one lump sum payment. Or they may let you cure missed payments over time.

Federal Programs Offer Foreclosure Help

The CARES Act requires most mortgage servicers to provide forbearance. You must have experienced a coronavirus-related financial hardship. Covid hardship forbearance applies to federally backed mortgages. These include HUD/FHA, VA, USDA, Fannie Mae, and Freddie Mac loans.

Borrowers need to request forbearance from the lender or servicer. You have a right to receive a pause or reduction. Certain mortgage servicers must offer up to six months. You may request an extension of the forbearance period. Some lenders can extend the period an additional 180 days. Affordable plans to make up missed payments may be available.

Loan Modification

If you’re experiencing long-term financial hardship, consider a loan modification. A loan modification changes the loan terms by lowering monthly payments. Missed mortgage payments will be added to your total amount owed. The loan’s interest rate may be lowered. The term may be extended.

Refinance the Mortgage

To apply for refinancing, you need to be current on payments. A refinance replaces the old loan with a new loan. The new loan terms may have a lower interest rate. The term of the loan may be different. Your credit score will determine whether you can refinance with better terms.

Bankruptcy

Bankruptcy is also an option. In most cases, filing stops a foreclosure. Filing for Chapter 13 bankruptcy may help you save your home. A homeowner can keep their house via Chapter 13. You pay back missed mortgage payments over time through a plan. You’ll also have to keep up with regular mortgage payments. Loan modifications may also be available through Chapter 13. Speaking with a bankruptcy attorney for free can help you understand your options.

Sell Your Home and Short Sale

You could hire a real estate broker to sell your home. From the sale proceeds, you can pay off the mortgage. If you can’t sell for more than the mortgage balance, contact your lender. See if they will accept less than the balance. This is called a short sale.

In a short sale, the lender may hold you responsible. You owe the loan amount minus the money from the sale. This is similar to a deficiency balance after foreclosure. As part of the short sale, negotiate with the lender. Ask them to waive the deficiency. If the lender waives the deficiency, you may owe income taxes. The forgiven debt counts as income.

Deed in Lieu of Foreclosure

A Deed in Lieu of Foreclosure happens when the lender agrees to something. You transfer ownership in the property to the lender. This satisfies the loan and avoids formal foreclosure.

Options are available if you can’t make your mortgage payments. Being proactive is important to see what might work for you. Simply walking away from your mortgage will leave a lasting mark. Taking action may help reduce what you owe to the lender.

Summary

Taking out a mortgage is a big commitment. When you understand how default happens, you can protect yourself. You may be able to avoid default or minimize negative impact. If you’re having difficulty making payments, contact your mortgage servicer. Work out a solution. You’ll want a plan to deal with delinquency before it snowballs. Don’t let mortgage debt become unmanageable.