When times are tough, it can seem impossible to keep up with all your bills. However, if you don’t make your monthly mortgage payments, you risk facing mortgage default and potentially losing your house.
Such events are catastrophic but can be prevented if you know the appropriate steps to take. Learn about mortgage defaults, what they entail and how you can avoid them, so you can protect your home and your finances.
What It Means To Default On A Mortgage Loan
A mortgage default arises when a borrower fails to make monthly payments to their principal balance or interest on a home loan. Yet, defaulting can also occur with credit card and student loans. When a borrower repeatedly misses payments or stops making them altogether, there can be serious ramifications both in the short and long term.
A mortgage default can cause a borrower to lose their house and damage their credit score. In the long run, defaulting can also increase the borrower’s interest rate on other debts and make it challenging to qualify for a future loan.
How Does A Mortgage Default Happen?
While missing monthly payments is the most common way for a home loan default to occur, it’s not the only one. Homeowners can also go into default if they:
- Fail to pay their property taxes.
- Fail to pay their homeowners insurance.
- Transfer their home’s title to a new owner without their lender’s permission.
- Severely damage their property and decrease its value.
- Use their property to conduct illegal activities, like dealing drugs.
What Happens If I Go Into Mortgage Default?
If you go into mortgage default, you’ll be given the opportunity to repay your loan before your lender takes control of your property. However, if you fail to reach out to your lender, you can expect to experience the steps discussed below.
Your Lender Accelerates Your Debt
If you are over 30 days past due on your mortgage, your lender may invoke the acceleration clause in your mortgage contract. Through this clause, your lender can accelerate the debt and demand that you immediately pay the entire remaining balance of your loan. This step makes it easier for your lender to ultimately foreclose on your property.
Your Home May Go Into Foreclosure
If you don’t have the funds to pay the outstanding balance on your mortgage, your lender will move to foreclose on your house. Depending on your state laws, you’ll have about 120 days before foreclosure proceedings begin.
You May Lose Your Home
If your lender proceeds with the foreclosure, you’ll be forced to leave your home. Once control over your property is transferred to your lender, they’ll auction it off to recoup the funds you were unable to pay back.
How To Avoid A Mortgage Default
Obviously, defaulting on your loan and losing your home is a scary prospect. However, the foreclosure process doesn’t happen overnight. Even if you’re experiencing financial hardship, there are ways that you can avoid defaulting on your mortgage.
Speak With Your Lender
If you know you’re going to be unable to make your monthly mortgage payment, speak with your lender immediately. The sooner you reach out, the better your chances of avoiding a mortgage default.
When speaking with your lender, you should explain why you can’t afford the payment now, when you think you’ll be able to and how much you can pay in the meantime. Many lenders are willing to work with borrowers to come up with a solution if you reach out in advance.
Your lender may be willing to offer you mortgage forbearance, a period during which your lender agrees to let you reduce or pause your monthly payments, and help you create a repayment plan.
If your lender is unwilling to offer you forbearance, you can contact the Department of Housing and Urban Development (HUD). HUD has counselors who can examine your financial circumstances and help you find a solution that will enable you to avoid defaulting on your loan.
There are a variety of state and federal programs that assist borrowers in danger of defaulting. A HUD counselor can explain your options to you, help you select a program that’s best suited for your needs and speak to your lender on your behalf.
Find Out If You Can Refinance
If you still qualify, refinancing your mortgage can be a handy way to avoid a home loan default. When you refinance, your existing mortgage gets paid off and replaced with a new loan that has new terms.
The new loan may provide you with a lower interest rate or allow you to extend the term of your loan. Therefore, through a refinance, you can potentially lower your monthly payments and make them more affordable.
Consider A Mortgage Loan Modification
If you don’t want to refinance, you can get a mortgage loan modification instead. A loan modification differs from a refinance in that it allows you to maintain your current loan but change its terms.
Depending on what your lender agrees to, a loan modification could enable you to lower your interest rate, extend the term of your loan or even change your loan type from an ARM to a fixed rate, for example. Regardless of how your lender chooses to modify your loan, the result is the same: A more affordable mortgage that will help you avoid default and foreclosure.
The thought of defaulting on your home loan can be terrifying, but don’t let it prevent you from taking action. Even if your monthly payment is already past due, you can still take steps to avoid foreclosure. Contact your lender as soon as you realize you may be in danger of missing a payment, and they will help you find a solution.
For answers to all of your real estate and mortgage-related questions, visit the Quicken Loans® Learning Center.