Understanding Mortgage Default: What Happens When You Can't Pay

Mortgage Default Explained: What Really Happens When You Can’t Pay Up

By Julie Ryan Evans
Jul 20, 2023

As homeowners, we're well aware of the importance of timely mortgage payments to keep our homes secure. However, life can throw unexpected challenges our way, leading some individuals to face the dreaded situation of mortgage default. Let's delve into what mortgage default means and how to avoid finding ourselves in this concerning scenario.

Mortgage default occurs when a homeowner fails to adhere to the terms of their home loan agreement, as explained by Casey Fleming, a mortgage adviser and author. While the most common issue is missing or late payments, other infractions can also lead to default, such as failing to pay property taxes, lacking homeowners insurance, or engaging in illegal activities within the property. There are various ways one can fall short on their mortgage contract.

So, what happens when you're unable to make mortgage payments on time? Typically, lenders start raising concerns when payments are 30 days past due. They will send you a notice of default, urging you to address the problem. Ignoring these reminders is a critical mistake. Whitney Fite, president of Angel Oak Home Loans, emphasizes the importance of communication and advises reaching out to the lender as early as possible to discuss options if you anticipate payment difficulties. Lenders may be willing to lower or suspend payments temporarily to assist you through financial hardships.

Avoiding mortgage default is crucial for several reasons. Firstly, it ensures you maintain a positive relationship with your lender and shields your credit score from unnecessary damage, preserving your ability to borrow money in the future. However, ignoring the notices and failing to communicate can lead to a far worse situation: foreclosure. After 120 days of missed payments, a lender may initiate foreclosure, taking possession of the home to recover their losses.

Foreclosure is a distressing process that forces the homeowner to vacate their property. It can have long-lasting consequences, including a seven-year mark on your credit record, making it challenging to secure new loans or buy a home in the future. Moreover, the borrower might be subject to IRS reporting for any losses incurred by the lender.

To avoid mortgage default and foreclosure, it's essential not to fear your lender if you encounter payment problems. In fact, lenders would rather work with borrowers than proceed with foreclosure. They prefer to collect payments rather than halt their income stream. Therefore, being proactive and approaching your lender if you foresee payment difficulties can lead to more understanding and flexible solutions.

In conclusion, mortgage default is a situation no homeowner wants to face. By communicating with your lender and addressing payment issues promptly, you can steer clear of this distressing scenario and maintain a stable financial standing. Remember, lenders are not loan sharks; they are more willing to assist if you approach them with openness and honesty.

Find the original article here: https://www.realtor.com/advice/finance/mortgage-default-what-happens-when-you-cant-pay/

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