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Life happens to the best of us, and sometimes you can’t help a mortgage delinquency. Does that mean you’ll automatically lose your home?
Not necessarily, but it does require specific steps.
Here’s everything you must know about a delinquent mortgage and how to handle it.
What Is Mortgage Delinquency?
Mortgage delinquency means you missed your mortgage payment by at least 30 days.
Most mortgage loans come with a grace period of 15 days that don’t incur a late fee, and between 15 – 30 days late, you pay the penalty but are still not considered delinquent.
The minute you cross that 30-day threshold, though, your mortgage is late.
What Happens a Mortgage Loan Is Delinquent?
A few things can happen when a mortgage is delinquent. First, you’ll pay a late fee for every grace period you miss. But the consequences get worse the later your payment becomes.
When you miss your first payment (30 days+ late), it will affect your credit score. Payment history makes up the largest part of your credit score, so it’s a big hit.
But the later you get with your payments, the riskier it becomes. At 60 days, you may receive more phone calls and letters from your mortgage lender.
You’ll likely enter pre-foreclosure at 90 days late, which means you’re closer to losing your home than keeping it if you don’t make up the past due payments fast.
How Do You Avoid Mortgage Delinquency?
Mortgage delinquency happens to even the best of us, but if you prepare well, you can avoid the risk of mortgage delinquency in the first place.
Compare Lenders to Find the Lowest Rates
Before you choose a mortgage, get quotes from at least 3 lenders. Find out which lender offers the most affordable payment and fees. Don’t get stuck in an unaffordable mortgage. Look at the big picture when comparing loans.
Compare loans with the lowest interest rates to loans with the lowest closing costs. Either you’ll have a lower monthly mortgage payment or more money in reserves if you don’t have to pay everything to the loan’s costs.
>> More: The Best Online Mortgage Lenders
Make Sure You Can Afford the Mortgage
Don’t make yourself house poor. In other words, don’t take on a mortgage that maxes out your budget. What happens if your income changes?
If you have a high mortgage payment that you ‘just made’ it with when you made more money, you can easily become delinquent when things change.
Leave a buffer between your financial commitments and income. This way, if life happens (and it will), you’ll be prepared for anything.
>> More: How to Choose the Best Mortgage
Plan and Budget for Expenses
Do your research and know how much it costs to become a homeowner in your area. You become solely responsible for the mortgage payment, real estate taxes, homeowner’s insurance, HOA dues, and home maintenance.
Budget for the unexpected by having liquid assets on hand. Make an emergency fund a part of your budget and regularly replenish it if you have to dip into it for true emergencies.
Don’t forget to plan for other financial emergencies in your life too. Cars break down, people get sick, and people even lose their jobs.
Create a budget that can handle any downfall while figuring out how to put the pieces back together.
Reach Out to Your Lender
If you do get behind or know, you will reach out to your lender right away. Don’t ignore it and think it will get better.
Not talking to your lender is the worst thing you can do. Especially during the pandemic, lenders have many ways to help homeowners keep their homes and get current on their debt.
How to Resolve Mortgage Delinquency: Tips and Tricks
Like I said before, there are ways lenders can help you resolve your mortgage delinquency. Don’t think of it as embarrassing or just a temporary issue. Get in touch with your lender right away and see which of these options may be right for you.
Ask your lender about your forbearance options. When you put your loan into forbearance, it’s like a temporary halt on your payments. This was common at the start of the pandemic, but many lenders still offer it.
But the interest still accrues.
You don’t owe payments now, but you will owe the full amount of what you didn’t pay at the end of the period.
Before you agree to forbearance, ask your lender about the repayment terms. Some will tack the unpaid balance onto the end of your loan. Others will require payment in full at the end of the forbearance agreement.
You may be able to work out a payment arrangement with your lender, too, that allows you to spread the payments out over 6 – 12 months.
Change Loan Terms
You may be able to get a loan modification too. These are extremely popular today, especially for those who can’t afford to get current on their loan.
A loan mod will alter your loan’s terms either by lowering the interest rate, lengthening the term, or any other way they can make the payment more affordable for you while allowing you to stay in the home.
If you can’t get current on your loan or know you can’t afford the long-term mortgage payments, you can let it go to foreclosure.
It’s not the ideal situation, especially since a foreclosure hurts your credit score considerably, but if you can’t afford the payments, it’s an option.
A voluntary foreclosure may make things easier on you and hurt your credit score less. Also known as a deed in lieu of foreclosure, you hand over your deed to the bank and leave the home.
The bank doesn’t incur legal fees and has hours of work involved in the process, making it cheaper.
Consider a Short Sale
If you aren’t too far behind on your loan yet but know you can’t afford it anymore, consider a short sale. To do this, you must get the lender to agree first. If approved, the lender works with you and the buyer to complete the sale.
The lender approves the sales contract (not you) and the terms of the sale. If approved, the lender accepts the amount on the sales contract as payment in full and reports your mortgage to the credit bureau as (settled as agreed).
Is Mortgage Delinquency a Bad Thing?
Mortgage delinquency isn’t good. One late payment could drop your credit score considerably, especially if you had good credit before that.
A late mortgage payment stays on your credit report for 7 years, but it affects your credit score the most in the first year.
Bottom Line: What Is Mortgage Delinquency?
Mortgage delinquencies can feel overwhelming, but they can be worked around when dealing with them the right way. The key is to be proactive.
If you know you’re going to have a mortgage delinquency, talk to your lender right away. Find out what options you have before you get so far in the hole that you can’t get your way out.