When things are rough, paying bills might seem unattainable. If you don’t pay your mortgage, you might lose your home.
Such catastrophes can be avoided with proper preparation. Let’s discuss mortgage-with-defaults and how to avoid it to safeguard your house and finances.
Mortgage Default Definition
When a borrower misses mortgage payments, they default. Credit cards and student loans can default. When a borrower misses payments or stops making them, there are short- and long-term consequences.
A mortgage default can lead to home loss and credit ruin. Long-term, defaulting might increase the borrower’s interest rate on other debts and make future loans difficult to get.
What Causes Loan Default?
Missing payments is the most prevalent cause of mortgage default, but it’s not the only one. If homeowners:
- Don’t pay taxes
- Skip homeowner’s insurance
- Transfer title without lender’s approval
- Purchased or are utilizing the property illegally, such as drug trafficking or money laundering
In Mortgage Default, What Happens?
If you default on your mortgage, you can file for loss mitigation before your lender seizes your home. If you don’t contact your lender, expect the following processes.
- Lender Accelerates Debt
If your mortgage is overdue by 30 days, your lender may apply the acceleration clause. This condition allows your lender to demand prompt payment of the loan’s amount. This step makes your lender’s foreclosure simpler.
It’s doubtful your lender would accelerate your debt if you’re 30 days past due. Before using the acceleration clause, your lender will try to help you.
- Your Home May Foreclose
If you can’t pay your mortgage and have no other choices, your lender will foreclose. Depending on your state’s rules, you must be 120 days behind on the loan before foreclosure may commence.
- Home Loss Possible
If the default isn’t resolved before foreclosure, you’ll lose your house. Once your lender has custody of your property, they’ll auction it to recuperate the monies you couldn’t pay back.
How To Avoid Default?
Losing your house to a loan default is terrifying. However, foreclosure takes time. Even if you’re struggling financially, you can prevent mortgage default.
If you haven’t defaulted, try refinancing. Refinancing replaces your old mortgage with a new loan with new conditions.
The new loan may provide a cheaper interest rate or longer duration. Refinancing can cut monthly payments, making them more accessible and manageable. If you can’t refinance, talk to your servicer about your choices.
- Consult Your Provider
Immediately contact your loan servicer if you can’t make your mortgage payment. If you act quickly, you can prevent mortgage default.
Explain why you can’t afford the payment, when you’ll be able to, and how much you can pay in the interim to your lender or servicer. If you contact lenders in advance, many will work with you to resolve late payments.
Depending on your difficulty, you may qualify for mortgage forbearance, during which your lender reduces or pauses your monthly payments and helps you construct a repayment plan.
- Modify Your Mortgage
Loan modification lets you keep your current loan but adjust its terms temporarily or permanently. A loan modification aims to minimize monthly payments and roll over past-due payments into the mortgage.
Note that loan changes might negatively affect your score more than refinancing. Rolling your past-due payments back into the loan may also force you to spend extra for your property owing to the additional interest you’ll pay. Talk to your servicer to see if this choice is useful long-term.
- Short Sale Or Deed-In-Lieu-Of-Foreclosure
If none of the above alternatives work, you can sell your house, file for a short sale, or request a deed instead of foreclosure.
When payments become unaffordable, selling your house may be the best option. In this manner, you can recoup equity before foreclosure.
If you can’t sell your house traditionally, consider a short sale. You and your lender can agree to a short sale to sell the house for less than the mortgage. The selling profits would go toward your loan debt, and depending on the conditions, the lender either forgives the rest or expects repayment. Short sales are better than foreclosure since they’re less detrimental to your credit.
Don’t let the fear of defaulting on your mortgage stop you from taking action. You can avoid foreclosure even if your payment is late. If you’re at risk of skipping a payment, contact your lender as soon as possible.