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Losing your job, falling ill, or facing other financial difficulties can make it hard to stay current on all of your bills.
If you miss a monthly mortgage paymentor two, you could be on your way to mortgage default, leading to a foreclosure if you aren’t careful.
Understanding what it means to default on your mortgage and how you can prevent it is the key to saving your home.
What Does It Mean to Default on a Mortgage Loan?
If you’ve missed three to six mortgage payments, you’re considered to have defaulted on your mortgage loan. This means you defaulted on the agreement you signed, and the bank may take further action.
Before your home goes into default, you’ll receive warnings from yourmortgage lender. Each lender has a different threshold regarding when they send the warning letter. The letter is meant to prompt you to get support now, or you risk losing your home.
How Does a Mortgage Default Happen?
Mortgage default happens most commonly because of missed mortgage payments, but there are two other big pieces to the puzzle.
You agree to pay the mortgage and your real estate taxes, and homeowner’s insurance when you sign the mortgage documents.
If you don’t pay your property taxes, it’s an automatic mortgage default. If you don’t keep up with your homeowner’s insurance premiums, the mortgage company can choose to ‘force place’ insurance on you. The new mortgage insurance will cover only the lender but at your cost.
Other reasons you may have mortgage default include:
- Transferring the home to someone else without telling (or asking) the lender
- Not keeping up with home maintenance and forcing the home’s value down
- Participating in illegal activity in the home
What Happens If Your Home Goes into Default?
If your home goes into default, you have a small window of opportunity to bring it current. The exact timeframe and terms are between you and your online mortgage lender, which is why communication is key when dealing with mortgage default.
If you don’t bring your account current, you’ll put yourself at risk for any of the following.
Risk of Foreclosure
Your lender has the right to start foreclosure proceedings on your property if you don’t make good on your debt.
You’ll likely get 120 days between the start of the foreclosure proceedings and when they actually follow through with it.
If you satisfy the debt between that time, you may also owe legal fees and other costs the lender endured in the foreclosure process.
Lender’s Will Accelerate the Debt
If you violate any part of your mortgage agreement, the lender has the right to accelerate the debt. This means they can demand the outstanding amount be paid in full immediately. Most people can’t afford this amount, which then leads to foreclosure.
You Could Lose Your Home
If you don’t rectify the situation and come current on your debt or work out a plan with your lender, you could lose your home.
If the lender goes through with foreclosure proceedings, it may take a few months, but they’ll eventually take possession of the home.
How to Avoid Mortgage Default
Mortgage default may feel imminent in certain situations, but it is preventable with these steps.
Reach Out to HUD
Contact HUD (Department of Housing and Urban Development) if your lender won’t discuss options with you or provide feasible options, contact HUD (Department of Housing and Urban Development). HUD counselors work with these situations daily and can help you find a way to avoid losing your home.
Many states have programs that help people in this exact situation. Working with a HUD counselor will get you in contact with these programs to decide which one is right for you.
Refinance Your Mortgage
If you haven’t missed any payments yet, consider refinancing your mortgage loan. If your credit score is average and you have equity in your home, you may be able to refinance the loan and get a loan with a lower interest rate or even a longer-term.
The key is to get a more affordable payment. If you have to take a longer-term, for the time being, make the minimum required payments.
But, when you’re back on your feet, consider making extra principal payments so pay the balance down faster and don’t pay as much interest.
Modify Your Mortgage Loan
If you’ve already defaulted on your loan or missed a couple of payments, ask your lender if you’re a good candidate for a loan modification.
Loan modifications are more popular today than ever, and many lenders offer them. You have to go through your current lender to modify your loan.
If you qualify, you may get a lower interest rate, or the lender may tack on the unpaid principal balance to the end of the loan, allowing you to get back on track with a fresh start.
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Talk to Your Lender
You may feel embarrassed or worried about talking to your lender, but NOT talking to your lender is the worst thing you can do.
Your lender may have plans you didn’t even think about or can work out a payment arrangement to make it easier for you to get back on track.
Ignoring the debt and hoping it will get better never leads to anything good. Start the conversation with your lender rather than them starting it with you. If they have to start it, the conversation usually starts with the topic of foreclosure.
Create a Financial Plan
If you’re behind on payments, consider how you’ll get back on track. Figure out how much you can afford to pay in addition to your regular mortgage payment and propose that amount to the lender.
You never know when they’ll accept what you have to offer. The last thing they want is to take possession of your home, so they’ll often work with you when you’re proactive.
Consider Forbearance Options
Some lenders still offer forbearance options even though the ‘mandatory forbearance’ period ends. A forbearance is a temporary halt on your payments. You aren’t required to make monthly payments during the agreement but can if you’re able to.
Just keep in mind that once the agreement ends, you’ll owe the unpaid balance. Some lenders break it over a few months, or longer and others tack it onto the back of the loan. Always ask a lender what they’ll do – don’t assume.
Bottom Line: What Is Mortgage Default?
Don’t ignore the financial issues you’re having. Talk to your lender right away if you know you can’t make your mortgage payments on time.
Try to be proactive rather than reactive, and you’ll get better results. Lenders don’t want your house on their hands, so they’ll likely work with you as long as you are honest with them.