If you have a mortgage, we hope that you know just how important it is to make those payments on time, every month. However, sometimes life knocks you down and people are unable to pay their mortgage and end up in mortgage default.
What is a Mortgage Default?
To default on a mortgage means not meeting the terms of the home loan agreement. Missing or late payments are the most common problems, but they are only infractions that land homeowners in hot water.
Homeowners can also default on mortgages for not paying property taxes, or lacking homeowners insurance, or using their home for illegal activities. In other words, there are many ways to fall short on your mortgage contract.
What Happens if You Don’t Pay the Mortgage?
The length of time it takes for a mortgage to be in default varies by lender and contract, the typical time frame to watch for is 30 days past due. Once your payment is more than a month late, your lender will send you a notice of default and ask you to correct the problem. If you don’t the lender will usually send more reminders, and call. As unpleasant as those reminders might be the worst thing you can do is ignore them.
Communication is key. Reach out to the lender early to explore your options if you know you’ll have trouble making your payment on time. Ideally, you should reach out before your payment is even due to discuss your options.Mortgage lenders aren’t loan sharks who will tear you apart for not being able to pay. In fact, they may be more flexible about lowering or even suspending payments for a period of time.
If you speak to your lender, you can usually work something out. If you speak up, you will remain in good standing with your lender, and it could keep your financial troubles from lowering your credit.
When Mortgage Default becomes Foreclosure
After a payment is 120 days late, a default can turn into something far worse, a foreclosure. That is when the lender takes possessions of the home and tries to sell it to recoup its losses.
Once the lender begins the foreclosure, you will have to pack your bags and move out.
A foreclosure stays on your credit record for seven years, which could make it harder to buy a new home down the road. Plus, once a property is liquidated through foreclosure and resale, the borrower could be reported to the IRS for any loss the lender incurred for lending you money.
The IRS considers the lender’s financial loss taxable income for the borrower. Many people don’t realize this until the following January when they receive a 1099 form in the mail for thousands of dollars.
How to Avoid Mortgage Default & Foreclosure
The key thing to remember is to not be afraid of your lender if you foresee problems in making your mortgage payments. Mortgage lenders don’t want to foreclose. They are in the business of collecting your payments. If they foreclose, their income stream on your mortgage stops.
That is why they will tend to work with you if you find yourself unable to make monthly payments. They will be much more understanding if you approach them, rather than waiting until they call to ask you why you missed a payment.
