Are you late on a mortgage payment, or worse, missed a mortgage payment altogether? Here’s a guide on what will happen if you default on your mortgage…
The total value of outstanding mortgage debt by American homeowners amounted to $15.4 trillion in 2018.
When you have a mortgage, it’s important to comply with the terms of payment you signed. Contract violation could lead to consequences that may end up costing you more than you think.
Are you late on a mortgage payment, or worse, missed mortgage payment altogether? Here’s a guide on what will happen if you default on your mortgage.
Ways You Can Default on Your Mortgage
There’re a number of ways you can default on your mortgage that may lead to dire consequences. The length of the mortgage to be at default varies by contract and lender with a time frame guide of 30 days past payment date.
- Not paying property taxes
- Not paying homeowners insurance
- Forwarding transfer deed to a new owner without lenders persimmon
Defaulted, what happens now?
1. Notice of Late Payment
Your lender will send you a notice on your
late payment and request you to adhere to the repayment plan. To ensure it
wasn’t an oversight on your end, they might call you as a reminder.
In case there is a financial strain to pay, kindly communicate efficiently and in good time. You need to reach out to the lender and discuss alternative ways of repaying the loan and explore different options.
Reach out to the lender before your due date and discuss how to ensure you repay. This will also keep you on good terms with the lender if you communicate effectively.
2. Credit Score Drops
Your credit score will drop with every default. The payment history account gets knocked off a few points every time you default or there is a late payment. The impact on your credit score by late payment depends on your overall credit history. The credit bureau calculates your score and defaulting by a number of days will significantly lower your rating.
In most cases, mortgages have a grace period of at least 15 days. If you ignore the notice sent to you by your lender, you may be slapped with penalties for defaulting. The lender will charge you lateness fees and invoke other financial penalties based on your contract. Depending on the number of days you have defaulted, the penalties may be to 5% of the overdue amount.
If you are late by at least 30 days, you are sent a notice of default and are given at least 30 days to pay the mortgage balance and interest incurred.
4. Debt Goes to Collectors Through Missed Mortgage Payment
Worst case scenario, when your default loan goes to collectors, then your credit score takes an even deeper nosedive. If the lender outsources an attorney or a debt collecting company, you will be liable to pay for their fees as well. unfortunately, this raises the outstanding amount on the mortgage. Ensure you verify that the collecting agency has a right to come and recover from you the defaulted amount.
To buy yourself some time to get some funds and pay the default payment, send a written verification request to your lender. Ask whether they have given the go-ahead to the collector to recover from you. The collectors should have a written notice verifying the lender contracted them.
If you are unable to pay, be proactive and reach out to your lender to discuss other options of resolving the problem.
When you are unable or unwilling to pay your monthly payments, you are at risk of foreclosure. This is a legal procedure that varies from state to state. If you are more than four months late on a payment, the lender will engage a lawyer who will schedule a foreclosure sale.
Once the process beings, you will be forced to pack and leave your house. It takes about five months when the process culminates and the mortgage lender repossesses the home, auctions it in an effort to recover their money.
The home may be sold at a throw-away price depending on the amount of money you owe the lender plus penalties plus attorney fees.
Unfortunately, foreclose taints your credit score further and this may make it difficult to access funds in the future from lenders. Landlords will also be wary of letting you rent their spaces as well.
Deficiency Judgment, In Some States
Some states allow a mortgage lender to pursue a deficiency judgment if they are not able to fully recover their fees even after selling your home.
Ensure you read more on the fine print of the terms and conditions in case of default and know if your state allows deficiency. This can be a slap on both your cheeks if you lose your home to foreclosure and the lender still comes after you to cover the outstanding amount.
Can’t Pay Your Mortgage? Payment Help is Available
It’s important to address the issue than ignore it. Seek foreclosure prevention assistance early and from the moment you realize that you will not be able to pay on time. Talk to your lenders and come up with alternative options to repaying the mortgage payments. For example, you can decide to move to a cheaper house and rent out your home for a period of time the mortgage is repaid. You can be a landlord.
Seek a housing consoler services who will advise you on how too protect your credit score, avoid foreclosure and any other issues.
Plan Your Mortgage Payment
It’s a difficult decision to walk away from your home. However, circumstances may force the inevitable. If your credit score is affected, owning a new home through a lender may be difficult but you can start saving some money early. To avoid other liabilities, maintain your homeowners’ insurance and ensure you pay your property taxes.
In a situation where you know your mortgage lender may come after you, you can apply for bankruptcy which will temporarily postpone the lender from coming for your home. You will be required to have soundproof of inability to pay when missed mortgage payment.
Filling for bankruptcy can also eliminate the entire judgment. For more information visit our finance section in our blog!