Mortgage default: Everything you need to know

Buying a home is both an achievement and an act of optimism. You’ve earned the right to borrow hundreds of thousands of dollars and are confident that you’ll have the resources to repay that loan with interest in the years that follow.

But life is anything but predictable. Despite the best intentions, you may find yourself in danger of defaulting on your mortgage. Understanding what default means and your options can help you decide on the best course of action.

What happens when you default on a mortgage?

To default on your mortgage means you’ve violated your mortgage agreement in some way. The most common violation is failing to make your monthly mortgage payment. Nonpayment violates the terms of your promissory note or deed of trust that you signed when you closed on your mortgage. Missing one payment means default.

Other ways to default include failing to pay property taxes, letting your homeowners insurance policy lapse, transferring the title without the lender’s permission, or damaging the property severely enough to affect the value of the home.

Lenders have two options when borrowers default: They can accelerate the debt or foreclose.

The servicer accelerates the debt

An acceleration clause in a mortgage agreement allows lenders to demand immediate payment of the outstanding balances from borrowers who breach the contract. The lender will send a letter before enacting an acceleration clause, and the borrower will have an opportunity to respond.

The contact will come from your mortgage servicer, which collects your payments and services your loan. This may or may not be your original lender.

The breach and default notice should include the specific breach your servicer is alleging. You typically have 30 days to come back into compliance with the contract or dispute the alleged breach. If the default is for nonpayment, a list of the amount owed will be included.

The letter also will inform you of your rights and how to contact your mortgage servicer for assistance.

Your home goes into foreclosure

Foreclosure is the process whereby a mortgage lender exercises its right to reclaim ownership of the home. When you take out a mortgage, your home is collateral for the loan. Your lender places a lien on the property that allows it to take ownership of the home if you default on your loan. If you and your servicer are unable to bring your mortgage up to date, foreclosure is the last resort.

Foreclosure can be a lengthy legal process. Generally, lenders wait 120 days before initiating foreclosure for missed payments. Things may move faster if you’re being foreclosed on for another reason, such as unauthorized property transfer or destruction of the home.

Once the foreclosure process has been completed, the amount of time you have to vacate the property varies from state to state. Some states may allow for redemption, letting you buy your home back.

Be sure to read all the paperwork sent to you and understand how the laws in your state apply to the foreclosure process.

Solutions for a mortgage in default

There are often options available if you need assistance with your mortgage. If you’re a Rocket Mortgage^® client, you can get in touch with us by signing into your Rocket Account. Under the Mortgage tab, go to Help > Payment assistance.

One or more of these options may be used to help provide you with payment relief, but you must qualify for the option through your servicer. While most of these will have a negative impact on your credit outside of specific situations like the aftermath of a natural disaster, it’s not as bad as having a foreclosure on your record.

1. Mortgage reinstatement

Mortgage reinstatement involves making a lump-sum payment of your past-due amount, including fees and costs. If you have the resources, this is the fastest way to get current on your loan again. For example, this may be feasible if an employer comes through with promised back pay.

Before attempting to reinstate your loan, request a reinstatement letter from your servicer to ensure you understand the amount required to satisfy your outstanding obligation.

2. Repayment plan

Another option is to work out a repayment plan with your servicer. You’ll restart your usual mortgage payments and pay an additional amount to make up the balance you owe.

Reach out to your servicer to discuss your financial situation and see if this is a viable option. Repayment plans are generally short-term, typically lasting 3 – 6 months.

Your servicer will work with you to create a repayment plan that fits your financial situation, but reaching out and taking the initiative to resolve your defaulted mortgage goes a long way.

3. Forbearance

Forbearance is a temporary reduction or pause in your monthly mortgage payment. You still owe the payments, but this may allow you to take a break while you get your finances in order. In qualifying you for forbearance or any form of relief, your servicer will ask for documentation on your hardship and finances.

Every situation is different, but these payment pauses are typically short-term in nature. As they go longer, the feasibility of getting current by paying back the forbearance becomes more challenging.

4. Loan modification

A mortgage modification may adjust attributes like the interest rate and term of your mortgage to bring the loan current. Past-due payments are added back into the balance and spread over a longer term, up to 40 years in some cases.

Depending on the form of modification, there may be a trial period prior to the modification being finalized. Modifications outside of those preceded by natural disaster are reported as past-due until the loan is brought current.

5. Deferral or partial claim

If, after a hardship, you can resume making payments, you may qualify for a deferral or partial claim. In this case, some or all of your past-due payments are moved to the end of your loan term. A partial claim is similar to a deferral, but the past-due payments become a secondary lien on your home.

6. Sell your home

If, after evaluating all your options, you determine there is no practical way for you to stay in your home long term, your servicer may talk to you about ways to gracefully exit from your home.

If you can sell your property at market value to pay off your mortgage, this is the best option because there’s no credit impact. You can take any leftover proceeds and put them toward your next home.

7. Short Sale

A short sale might be worth considering if you can’t afford your home and you need to permanently stop making your mortgage payments. A short sale occurs when you sell your home for less than the amount owed to your lender, which allows you to get out of your mortgage.

You should always list and attempt to sell your home for your full payoff amount first. If you find the value of your home doesn’t amount to the full payoff, reach out to your servicer to see if you’re eligible to participate in a short sale.

You won’t make any money on a short sale, and you’ll need to get your lender to agree to the terms. A short sale can be one way out of a sticky situation if you know you can’t afford your mortgage any longer.

In some states, lenders are allowed to pursue deficiency judgments for the difference between the balance you owe and the sale price. Lenders can issue a waiver, so be sure to communicate with your lender and servicer about whether you’ll owe the difference between the sale price and your balance.

Your servicer may also be able to provide you with relocation assistance in exchange for your cooperation during the short sale process.

8. Deed in lieu of foreclosure

A deed in lieu of foreclosure comes about 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 approach has several 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, you’ll find notices on your doorway, for example. A deed in lieu avoids that embarrassment.

Second, if you’ve come to the conclusion 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 want a conventional loan, you’ll have to wait 7 years after a foreclosure. With a deed in lieu, the waiting period is just 4 years.

The same dynamics around deficiency judgments and relocation assistance come into play with deeds in lieu that apply to short sales. So be sure to talk with your lender and servicer about what to expect.

9. Reach out to HUD

Working with your servicer is often the best source of assistance because they’ll have the most insight into the options available given your existing loan and situation. But going through a mortgage default can also be overwhelming. It’s understandable to seek guidance from multiple sources.

The Department of Housing and Urban Development offers housing counseling. These foreclosure prevention counselors will see if any state or federal programs are available to help you overcome this hurdle. They can even reach out to your servicer on your behalf to discuss options.

Enlisting a HUD counselor can be a terrific way to resolve your mortgage default, particularly if you don’t feel comfortable talking with your servicer.

FAQ

Now that you understand default, let’s answer some questions you may still have.

What is the difference between default and foreclosure?

Default is when you first violate your mortgage contract. Foreclosure occurs when the lender enforces its right under a lien to reclaim the property based on the borrower’s default. This is a last resort, and it often doesn’t get to that point.

How many days does it take to default on a mortgage?

Look at the terms of your mortgage contract, but you can be in default if you don’t make the payment by the due date. However, from a practical perspective, there is a grace period before payments are late. Additionally, if you’re less than 30 days late, it’s not reported to the credit bureaus.

What is the grace period for default?

Typically, mortgage contracts include a grace period that allows for payments made after the due date without incurring a late fee. Rocket Mortgage has a 15-day grace period after the due date.

Can I still get a mortgage with a default?

You generally can’t get a mortgage while in default on your current one. The impact of past defaults depends on the severity of the default. Late payments are treated differently from short sales, deeds in lieu, or foreclosures. One thing to keep in mind is that you also can expect to need to build your credit back up.

The bottom line: It’s possible to avoid mortgage default

Mortgage default is a breach of your mortgage contract. The most common cause of this is being behind in your mortgage payments, but you can also be in default if you sell your home without paying off your mortgage, for example.

If you’re struggling with your mortgage payment, the best thing to do is reach out to your mortgage servicer about options as soon as possible. Rocket Mortgage clients can reach out by signing into their Rocket Account and going to the Mortgage tab, under Help > Payment Assistance.