Mortgage Default: What It Is, How To Avoid It And What To Do If Your Home Is On The Line
Miranda Crace6-minute read
January 07, 2022
The real estate business has been going strong for the past few years. Despite the healthy market, there are still homeowners who struggle to make payments on their mortgage every month.
Your mortgage defaults when you can’t make your monthly payments anymore. Are you teetering on the precipice of mortgage default or are you already in default? If so, we have some tips to help you.
What Happens If Your Home Goes Into Default?
There are a few ways you might default on your mortgage. The most common being if you stop making your monthly payments. But there are other ways you might break your home loan contract and send your mortgage into default, including not paying your property taxes, not paying your homeowners insurance, transferring the title to a new owner without your lender’s permission or severely damaging the property and value of your home.
What happens when your mortgage goes into default?
Accelerating The Debt
As soon as you break your contract or stop paying on the loan, the lender can demand payment on the outstanding balance. This is called “accelerating the debt.” Most lenders will send you a letter before they accelerate the debt to give you a chance to catch up.
Let’s say you’re unable to pay the outstanding balance. The next step the lender takes is to foreclose on the home. This process usually isn’t instantaneous – federal law requires lenders to wait 120 days before beginning the foreclosure process (though the process varies from state to state).
Once your lender completes the foreclosure process, they’ll take control of the property and you’ll need to leave your home. The good news is, there are plenty of steps you can take to avoid this process from happening.
How To Avoid Mortgage Default
There are some steps you can take to avoid defaulting on your house when you need mortgage help.
Evaluate Your Finances
As soon as you start having issues paying your mortgage, come up with a plan. Whether that means finding a temporary or second job to help with income flow, evaluating your spending habits or dipping into savings, get ahead of the problem.
Work On A Plan With Your Lender
Let’s say you can predict you’re going to hit some bumps in the road and you’re going to miss a few payments. Reach out to your lender in advance. Let them know what’s causing the delinquency, when you expect to be back on track again and how much you can pay in the meantime. Many lenders are willing to work with you if you communicate with them ahead of time.
Remember, lenders don’t want to foreclose on homes. Most lenders would rather work with you to find a way to keep you from defaulting on your mortgage.
Solutions For Mortgage Default
Has your mortgage already defaulted? If so, now’s not the time to bury your head in the sand. There are many ways you can fix this situation and either keep your home or back out gracefully.
Here are our recommendations for solving your mortgage default crisis:
1. Work Toward Mortgage Reinstatement
It’s possible to reinstate your mortgage during the default period and avoid moving into foreclosure. Reinstating your mortgage means moving it out of default and reactivating the former home loan agreement.
To reinstate your mortgage, you’ll need to pay the amount that you were behind in paying, plus any fees or interest including exact fees and costs incurred on the loan through the end of the reinstatement period. Talk to your lender to confirm the full payment to have your mortgage reinstated.
This is a great solution if you’ve been without work for a short amount of time or fell into financial hardship due to other commitments or bills.
2. Talk To Your Lender About Forbearance Options
Your lender might agree to offer you forbearance on your home loan, which means you may be able to take some time to find a financial solution and keep your home.
Mortgage forbearance is a binding mortgage agreement made between you and your lender. The lender promises not to foreclose on your home and will give you a set number of days or months where payment is paused or temporarily reduced. After this period, you’ll be required to not only continue your mortgage payments but also repay the past-due balance per an agreed-upon payment plan.
This can be a great solution if you’re between jobs or facing a temporary financial cut. Just make sure you use the grace period to save every penny you can and plan how you’ll pay back the full amount once the repayment period begins.
3. Reach Out To HUD
Maybe your lender won’t agree to forbearance or maybe you don’t think this is the right solution for you. The Department of Housing and Urban Development (HUD) might be able to help. HUD has certified loan and housing counselors on its staff who can review your financial situation and mortgage default status to come up with a solution that benefits both parties.
These foreclosure prevention counselors will see if there are any state or federal programs available to help you through this hurdle and can even reach out to your lender on your behalf to discuss options.
Enlisting a HUD counselor can be a great way to resolve your mortgage default, particularly if you don’t feel comfortable talking to your lender or would like to speak with an expert.
4. Decide On A Repayment Plan
Another option you have is to come up with a repayment plan with your lender. This is different from forbearance because you won’t be granted a grace period where payments are paused or temporarily reduced. Instead, you’ll restart your usual mortgage payments and pay an additional amount to make up the balance you owe.
Look at your finances and determine how much you can afford to pay in addition to your usual payment. Then reach out to your lender and discuss how’ll you’ll make up for the past-due balance.
Your lender will work with you to create a repayment plan which fits your budget. But reaching out and taking the initiative to resolve your defaulted mortgage goes a long way.
5. Consider A Loan Modification
A loan modification is intended to help people who are having trouble making their payment get permanent relief. It can take the form of one or a combination of these options:
- Your interest rate can be changed so that it’s based on a modification interest rate index from Freddie Mac (these would be close to current market rates).
- The term of your loan can be extended to 40 years. Reamortizing your payments over a longer term means it’ll take longer to pay your loan off, but your loan will likely be more affordable. You can always pay additional amounts toward the principal on your mortgage to pay it off in the same amount of time as your original loan term.
- If you’re behind on your payments and owe more than your home is worth, your servicer has the option to set aside some of the excess principal. No interest is charged on that excess and it’s due when the rest of the loan is paid off.
- The modification is reported on your credit, so there’s the potential for it to affect your credit score and the ability to refinance or purchase a new house while under modification. It looks better on your credit than a foreclosure and you get to stay in your home.
6. Opt For A Short Sale
A short sale might be worth considering if you can’t afford your home and you need to get out of your mortgage payments. A short sale is when you sell your home for less than the amount owed to your lender in order to get out of your mortgage.
You’ll start the process by listing your home on the market as a potential short sale property. Once you have an offer, you’ll take this offer to your lender to see if they’ll accept the short sale. If they do, the money the buyer pays for the home will be applied to your mortgage balance.
You won’t make any money on a short sale and will need to get your lender to agree to the terms. It can be the best way out of a sticky situation if you know you can’t afford your mortgage any longer.
7. Deed In Lieu Of Foreclosure
A deed in lieu of foreclosure occurs when you voluntarily deed your house back to your lender to avoid foreclosure. While you still need to find a new place to live, this has a couple of distinct advantages over a traditional foreclosure process.
First, it's important to remember that foreclosure is a very public process in many ways. Even without the spectacle of a forced eviction, there are notices on your doorway, for example. A deed in lieu avoids that embarrassment.
Second, if you've come to the conclusion that there's no way to stay in your home or complete a short sale, this makes more sense than a foreclosure from the perspective of your future mortgage prospects. If you're getting a conventional loan, you have to wait 7 years after a foreclosure. With a deed in lieu, the waiting period is just 4 years.
Nobody wants to default on their mortgage. Luckily, there are plenty of ways to avoid this scenario and not go into foreclosure. Reach out to your lender to find out how willing they are to work with you if you’re experiencing financial issues. There are more options available to you. Reach out as soon as your financial strain begins.
Lenders want to keep you in your home and are often willing to work with you to come up with a repayment plan, a forbearance agreement or options to restructure your mortgage. You should look at your finances thoroughly before talking to your lender to determine what you can afford and how you’d like to proceed. Show your lender you’re a responsible homeowner and they’ll likely do what they can to help you keep your home.
For more information like this, check out our Learning Center.
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