What To Know About Mortgage Default

If you fall behind on your home loan, you risk entering mortgage default — this occurs when you fail to meet the obligations of your mortgage contract for 30 days or more. Not only will your credit take a hit, but you could ultimately lose your house to foreclosure.

Below, we’ll cover what you need to know about mortgage default, including the potential consequences and how to avoid it.

What is mortgage default?

When you sign a mortgage contract, you promise your lender that you’ll make timely payments on your home loan, as well as any associated property taxes, homeowners insurance and mortgage insurance premiums. Mortgage default occurs when you fail to meet some — or all — aspects of this promise.

However, even lenders understand that some financial hardships can be unavoidable, which is why many lenders offer a brief grace period — typically 10 to 15 days — for a single missed payment. However, once a payment is 30 days past-due, the lender will report it to the credit bureaus and your loan will be considered “delinquent.” At any time after this point, if the balance due isn’t paid in full, the lender can issue a default notice and accelerate the debt or pursue foreclosure.

Late payments, default and foreclosure will harm your credit score — and the later the payments, the steeper the penalty. If you find an incorrect late payment or default recorded on your credit report, you can take action to dispute it and have the credit bureau remove it. Otherwise, late payments can remain on your credit report for up to seven years.

What are the consequences of mortgage default?

If you’re in mortgage default and aren’t able to come to an agreement with your lender, the next step is foreclosure, which involves the lender repossessing and selling your house to recoup their money. Foreclosure has many financial and personal consequences worth considering.

You can lose your home

The most important foreclosure and loan default consequences are personal. The financial and emotional stress of losing a home has a lasting impact on a family’s well-being. It’s also much harder to qualify for another mortgage or rent a home with a foreclosure on your credit report, which can lead to even more stress and hardship.

Your credit will take a hit

Going through a foreclosure can drop your credit score by at least 100 points, though the exact impacts will depend on your score prior to the foreclosure. If you had a high credit score before the foreclosure, you may see a more dramatic drop after the foreclosure than someone with a lower credit score.

You may have to file for bankruptcy

Some homeowners delay or stop the foreclosure process by filing for bankruptcy. Chapter 13 bankruptcies stay on your credit report for seven years, while Chapter 7 bankruptcies stay on your credit report for 10 years. Aside from the credit impacts, you’ll also face a waiting period before you can qualify for another mortgage after bankruptcy.

Your lender might sue you

When a lender forecloses on your home, it sells the property to pay off your mortgage balance. If the purchase price doesn’t cover what you owe, your lender could sue you for the remaining balance.

You’ll have to wait to buy another home

It can take two to seven years to qualify for another mortgage after foreclosure. Foreclosures on government-backed mortgages show up on CAIVRS, a government database that lenders check to ensure you haven’t defaulted on previous federal debt.

The waiting period will vary depending on the mortgage type:

→ Conventional loan: You’ll have to wait seven years, but it can be as little as two years if there were extenuating circumstances.

→ FHA loan or USDA loan: Mortgages backed by the Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) require a wait time of at least three years, although both allow for a shorter wait if there were extenuating circumstances.

→ VA loan: Loans guaranteed by the U.S. Department of Veterans Affairs (VA) require a two-year wait, although exceptions can be made for extenuating circumstances.

How to avoid mortgage default

If you’re facing financial hardship and are concerned that your mortgage loan will go into default, here are some options to consider:

Reach out to your lender

If you’re struggling to make mortgage payments — even if you haven’t missed any yet — your first step should be to contact your lender. Give them insight into the hardships you’re facing and you might be surprised at how willing they are to work with you. Lenders are required to offer you loss mitigation options during the pre-foreclosure period (the 120-day period after your first missed payment).

Assess your financial situation

If you’re experiencing financial difficulties, evaluating your finances can help identify the root cause. If a drop in income is the issue, consider ways to boost your earnings, such as working extra shifts or picking up a side hustle. If your money troubles can be traced back to overspending, try to find small ways to cut back, like eating at home more often or canceling unnecessary subscriptions.

Refinance your loan

With a refinance, you can replace your existing mortgage with a new one that has more affordable terms. You can even refinance if you’re underwater with special HARP replacement programs through Fannie Mae, Freddie Mac and government-backed lenders.

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Apply for a loan modification

A loan modification is a change to the original terms of your mortgage. Your lender might agree to extend the term length or reduce your interest rate to make your monthly payments more affordable.

Consider mortgage forbearance

A mortgage forbearance is when your lender agrees to suspend or reduce your payments temporarily. This can help you get caught up on payments and avoid going into default.

What to do if your mortgage is already in default

If you’ve fallen behind on your mortgage payments and have already received a notice of default, here are some options to consider:

→ Housing counseling. The federal government provides free foreclosure-prevention counseling through its housing counseling program. A housing counselor can help review your financial situation and provide advice on ways to avoid losing your home.

→ Mortgage reinstatement. You may be able to reinstate your mortgage by paying off the overdue balance and any fees related to the default, including late fees, attorney fees and recording fees. The deadline to reinstate your loan will depend on your state’s laws or the timeline that’s specified in your mortgage or deed of trust.

→ Short sale. If your only option is to sell your home, consider a short sale. With this type of sale, you work with your lender to sell your home for less than the full amount owed on the mortgage. Unlike foreclosure, a short sale is a voluntary process. Keep in mind you may have to pay taxes on the forgiven mortgage balance.

→ Deed-in-lieu of foreclosure. A deed-in-lieu of foreclosure allows you to voluntarily transfer your property to your lender and, in exchange, the lender releases you from the mortgage. This option may make sense if it helps you stay in your home longer or if the lender offers to forgive your remaining loan balance.