In this article:
Can't afford to make your mortgage payments? You're not alone. Approximately 0.8% of mortgages nationwide were 30 to 89 days delinquent as of March 2021, according to the Consumer Financial Protection Bureau's National Mortgage Database. And this figure could rise as home loans are removed from forbearance prompted by COVID-19 relief plans and homeowners must start making payments again.
As mortgage payments become late, your loan may move into default, which allows the lender to take action to recoup their losses. If you're facing the threat of foreclosure and worry you'll lose your home, it's vital to seek options that could help you bring your loan current. Here's a look at how a mortgage default unfolds, the potential consequences and how to deal with it.
What Does It Mean When a Mortgage Is in Default?
When you get a home loan, your lender expects timely monthly payments that cover your mortgage's principal and interest. If you fall behind on payments or stop paying altogether, you risk defaulting on your mortgage.
Mortgage default can also arise for other reasons, including:
- Failure to pay property taxes
- Failure to carry adequate homeowners insurance
- Damage to your home that lowers its property value
- Transfer of the property's deed to a new owner without the lender's approval
- Failure to occupy the home even if you're required to do so per the mortgage contract
What Are the Consequences of Defaulting on a Mortgage?
If you default on your mortgage, the lender could demand payment in full for the total outstanding balance. You'll get a letter in the mail enforcing what's called an "acceleration clause" and have a set period to bring your loan current. If you're unable to pay this amount, the lender could resort to foreclosure and eviction.
The lender must wait at least 120 days following the initial default to begin the foreclosure process according to federal law. However, the specifics depend on the applicable laws in your state.
Lenders generally file one of the following:
- Judicial foreclosure: The lender will send a letter demanding payment within 30 days. If you fail to pay, the local court or sheriff's office holds an auction to sell your property to the highest bidder. Judicial foreclosure is permitted in all states and mandatory in select states.
- Strict foreclosure: This entails the lender filing a lawsuit against the homeowner, and usually happens if the outstanding balance on the home loan exceeds the property value. If the borrower fails to pay within a set period as ordered by the court, ownership of the property reverts back to the lender. Strict foreclosure is only allowed in a few states.
- Power of sale, or statutory foreclosure: Like with a judicial foreclosure, the lender sends notices requesting payment in a specific timeframe. An auction is held by the mortgage company following the waiting period if the borrower fails to pay. This form of foreclosure is permissible in several states. It can only be applied if a power of sale clause is included in the mortgage agreement.
If your home is foreclosed on, your credit score could take a major hit, and the foreclosure will linger on your report for up to seven years. In addition to the credit score harm that will likely result from a foreclosure, the presence of a foreclosure on your credit report could make it much harder to get another mortgage.
How Long Does It Take to Default on a Mortgage?
Here's the typical timeline for default on your mortgage and possible foreclosure:
- First missed payment: Most lenders offer a 10- to 15-day grace period to make your mortgage payment before charging a late fee.
- Mortgage default: If the loan reaches 30 or more days past due, the delinquency is reported to the credit bureaus. If the borrower's delinquent payments have broken the agreement in the promissory note, the lender may consider the mortgage in default. The lender sends a notice of default by mail to the borrower, communicating the intent to begin the foreclosure process. This typically happens after several missed payments, but the timeline for default can vary by lender and state law.
- Pre-foreclosure: If the borrower is unable to submit past-due payments and bring the loan current by a date set by the lender, foreclosure will proceed. The time between default and the finalization of the foreclosure process is known as the pre-foreclosure stage.
- Foreclosure: The lender petitions the court to begin foreclosure proceedings. A trustee is also appointed by the court to oversee the auction. If a nonjudicial foreclosure is filed, the lender can take action right away and complete the process in just a few months. But judicial foreclosures mandate court approval every step of the way, often leading to a drawn-out process.
- Notice of trustee sale: The trustee publicly displays notice that describes the property and communicates when the auction will be held.
- Auction: The property is put up for auction by the trustee. Its opening bid is determined by what's owed on the mortgage, the appraised value and other unpaid tax bills and liens. If the property fails to sell at auction, it becomes real estate-owned (REO) by the lender and offered for sale as-is.
- Notice of eviction: Whether the property is sold at auction or reverts to the lender as REO, a notice of eviction is issued to the occupants. They'll need to vacate the property within a specific timeframe.
How Do You Remedy a Mortgage Default?
Connect with your lender right away to discuss your financial situation. They may offer repayment plans, forbearance or other forms of help to help you get back on track.
Also, talk to a housing counselor approved by the Department of Housing and Urban Development (HUD). A HUD-approved counselor will review your financial situation and recommend federal and state programs that can possibly help you avoid or remedy a mortgage default. The Consumer Financial Protection Bureau maintains a database of housing counselors.
You can also explore refinancing options or modify your mortgage to avoid falling behind on your mortgage payments. If you refinance, you'll get a new home loan with new terms. If you get a mortgage loan modification, you'll still have the same loan, but your lender will extend your loan term, reduce your interest rate or modify your loan type. Either way, the goal is to lower your mortgage payment so it's more affordable.
A deed in lieu of foreclosure is another way to avoid foreclosure. Under this arrangement, you give the lender possession of the property and potentially negotiate with them to eliminate or reduce the balance you owe. You could also walk away with the funds needed to relocate through a "cash for keys" agreement. Or you can sell your home with the lender's approval for less than what you owe (a short sale) to alleviate overwhelming mortgage payments you can no longer afford. These options allow you to minimize the severe impact on your credit score that comes with foreclosure, but they'll still likely result in credit harm.
Take Steps to Avoid Mortgage Default
It's no fun to struggle with mortgage payments. Fortunately, there are ways to avoid or remedy a mortgage default and keep your home. Contact your lender promptly if you know you'll miss a payment or if it's already past due. They can work with you or make recommendations to help you get current on your payments and stay in your home.
Meanwhile, you should take the opportunity to reevaluate your spending plan and identify expenses you can reduce or eliminate to free up funds. It's also ideal to pursue other opportunities to increase your income to help remedy the problem.
If you plan to refinance your home loan to get a more affordable monthly payment, research lenders to determine which are a good fit. Also, check your free credit report and credit score from Experian to know where you stand as lenders consider your credit health when you apply.