What Really Happens When You Default on Your Mortgage?
What Really Happens When You Default on Your Mortgage?
Buying a home is one of the most significant purchases you will make in your lifetime, and the process is long, complicated, and can be stressful. And when people are unable to make our payments and are facing default and foreclosure, their minds can end up in a swirling downward spiral.
Going into default is stressful, scary, and overwhelming. It may seem like there is no way out, but keep your chin up and take a deep breath because there are paths to recovery.
In this article, we will go into detail on what a default is, what happens when you find yourself in default, and we will also outline steps homeowners can take to prevent foreclosure.
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Important Term Overview:
Before we begin, here is a list of key terms that will come up throughout this article, and their definitions as they relate to home loans.
- Lender: A lender is an institution, business, or person that loans you the money to purchase a home. These can include banks, Credit Unions, other private lenders such as Rocket Mortgage or Quicken Loan, family members, or friends.
- Borrower: This is you, or a person that is borrowing the money from the lender.
- Mortgage: A mortgage is the amount of money borrowed and the interest rate associated with paying back the money. Read more in depth on what a mortgage includes, here. Your Loan.
- Interest Rate: Rates set by the federal reserve that determine how much your loan will cost to pay back.
- Default: When a borrower has missed three consecutive house payments. Also the beginning of the Pre-Foreclosure process.
- Pre-Foreclosure: The time between falling into default and having your home repossessed.
- Foreclosure: Repossession of property due to non-payment
- Cured: To cure a default means that you will be required to pay the amount past due, as well as additional legal fees incurred by the lender during the default process.
What is the definition of a mortgage default?
Defaulting on a mortgage takes place with the borrower fails to make payments on their home according to the payment schedule outlined in the original contract with the lender, and has failed to make satisfactory arrangements with the lender.
A Notice of Default is different than a “late notice” because lenders must file it and have it recorded. This requirement means that lenders must file this notice with the county recorder’s office and also publish the notice in the newspaper for the public to see.
By doing this, the lender notifies the public of its intention to foreclose upon the home if the default has not been “cured,” which means to bring your loan current by paying the overdue amount of your mortgage payments as well as additional fees that have been incurred.
Once a Notice of Default is recorded, lenders have a minimum of 90 days that they must wait before they can move on to the next stage of the process. This could actually take longer than 90 days depending on how quickly the lender acts, but it’s better to play it safe and assume they will only take 90 days.
When will my Lender notify me that my Mortgage is in default?
Once you have fallen three months behind in your mortgage, you risk having notice of default recorded against your property. If this happens, you will get the notification via certified mail.
Once you have received a Notice of Default, your lender is the telling you that you are at the beginning of the “Pre-Foreclosure” process. Again, keep in mind that Defaulting is not the same as being in foreclosure, but it’s equally serious and is a critical point in time where you will want to take action.
What is the Mortgage Default Process?
If you find yourself in default, rest assured that you are not alone. Many Americans have found themselves in default, and have managed to find their way out again. It’s critical to understand this process to take action.
States vary on how they can legally take possession of your property, but they share the same time frames. From the date the notice is recorded, the lender has a minimum of 90 days before they can move to the next step after recording a notice of default. A foreclosure could take longer than this, but don’t bank on a lender dragging their feet.
Pre-Foreclosure Options & Borrower Rights:
During this default period, after the notice has been recorded with the county recorder and published in the newspaper, a borrower as THE RIGHT to “cure” the default. As we talked about a bit above, curing a default means to bring your payments current as well as additional pay fees incurred to bring the property out of default.
This is the time when it will be critical to take swift action. Here are some solutions to consider:
Pay What You Owe:
You may be thinking, “if I had the money, I would have paid it,” but it’s listed here because it’s the most uncomplicated solution concerning paperwork, approval, and effectiveness. Consider cutting other expenditures for a short time while and use the saved money to pay what you owe.
If you think that this might be doable, contact a financial advisor that can help you reduce your monthly overhead to allow for more money to be directed to your mortgage.
Once you understand that you’re in pre-foreclosure process, you’ll either need to pay the amount past due or consider other options such as a loan modification.
A loan modification may offer you the ability to change the terms of your loan such as lowering your interest rate which can help to make your payments lower. Making the payments lower can help you catch up, and continue to make on-time payments.
Short Sale during Pre-Foreclosure:
A short sale is an option that can allow you to sell your home during pre-foreclosure for less than what you still owe. It’s a complicated process, and the bank must approve it, but it can be a good option because the homeowner does the work of selling the home which is beneficial for the bank, by saving them time and money.
Make sure to hire an expert because an excellent Realtor® can help you navigate the paperwork, the sale, and even communications with the bank.
Lastly, If you are unable to make payments or arrangements, you may find yourself in foreclosure and repossession.
Consequences of Default
Receiving a Notice of Default will most likely have some significant adverse effects even if the process ends before you end up in foreclosure. It could result in fees and credit score drops.
What fees will I pay?
Fees will depend on the lender, but they can end up being massive numbers. The default process is a legal process and will require the bank or lender to employ the services of a lawyer which result in notoriously high fees.
In addition to this, there will most likely be late fees, and ultimately all of these will be passed on to the borrower. It could be a couple of thousand dollars, or possibly more. Numbers will be different for most people depending on the lender and depending on who they use to draw up and file it
Defaulting will have a negative impact on your credit report and could affect your ability to purchase another home, get credit cards, or other financings like cars or boats.
If possible, finding solutions before you go in default will help you avoid these credit score drops.
Filing for Bankruptcy
It’s a common misconception that if you are in default you might be required to file for bankruptcy. Filing for bankruptcy is not required if you are in default on your home loan. In fact, you actually never have to file for bankruptcy, ever.
If you find yourself in a situation where you can’t make payments and will never be able to climb out from under all of the debt you have, this is when you may want to consider it, but it’s your personal decision to do so.
Filing for bankruptcy removes your obligation to pay or drastically reduces what you will need to pay, but it will require expensive lawyer fees, appearing before a judge, and will have negative impacts on your credit for ten years.
How many people face a mortgage default?
Unexpected life events, mortgage rates, and market conditions can all play a role in a borrower’s ability to make the required payments, and many Americans have found themselves in default at one point or another. So, it’s an important thing to understand when you see yourself in default is that you are not alone.
In fact, In 2017, data illustrated that as many 1.27% of homeowners found themselves delinquent. And, during the financial crash of 2008, that number rose to almost 9 percent.
If that doesn’t make you feel better, you might be relieved to know that in 2017, of those that were in default, only .51% lost their homes to foreclosure which means that fewer people faced actual foreclosure than the number of people that were in default.
The great news here is that there are viable solutions to the getting out of default. People just like you who have been in your same situation found their way back from the road to foreclosure.
How Can a Realtor Help
A Realtor may not be the first person you think of when you receive a notice of default, but they may provide you with the some of best options and support available. Their support and knowledge can also provide a great deal of relief by helping you figure everything out. But not just any Realtor will do. It’s critical that you take the time to find and hire an expert Realtor like William Lowrey of Real Estate By Design.
Not only does he have years of experience and know the ins and outs of the default and foreclosure, but he is also actually a Certified Default Advocate which means Understands how to communicate with lenders and will negotiate on your behalf.
It will be their job to help you find solutions which may include the following selling your home before default, or making a short sale before default. Remember that Realtors can also assist you if you are already in default.
Selling before default:
It can be stressful to look at your accounts and realize that you may not be able to make the required payments. At this time it might be a good idea to consider selling your home. If your home has increased in value, selling it may help you pay off your loan and closing fees, and walk about with a little money in your pocket. We know this can be a stressful time and a hard decision to make, but it will ensure that your credit score remains intact and put you in a better position to purchase another home when the timing is better.
Short sale before default:
As in pre-foreclosure, you can opt for a short sale. It will require the bank to approve, and you might not leave with equity, but it will help you to avoid going into default which can negatively impact your credit score and can also save you from paying the additional legal fees required in default.
Contact Real Estate by Design Idaho Today for Help
If you have found your way to this article, you may be anticipating default, or you may already be in default.
If you are not currently in default, be proactive and begin thinking about how you will handle this problem. Contact your lender to see if you can find a solution that will agree to, or contact a Realtor or Certified Default Advocate that you can chat with over the phone to get more information.
If you are in default, don’t wait until 90 days is almost up. Take immediate steps and get expert advice.
Either way, whatever you do, don’t ignore the problem. We understand you’re stressed and frightened and know that this type of situation can be overwhelming. By taking the first step, speaking with somebody, or even just putting together an action plan, you can get a helpful sense of direction which will relieve anxiety and stress.