What Happens When You Default on Your Mortgage?
A mortgage is just about as serious a financial obligation that you can commit yourself to because mortgage loans typically run into the six-figures and get repaid over the course of multiple decades.
When you finally close on your home, you can count on your mortgage payments to come each and every month so it is crucial to budget comfortably for this recurring expense.
Knowing not only how much house you can afford, but also getting an idea of what your monthly mortgage payments will be due to your specific circumstances is important to ensure your mortgage payments will fall within your financial capabilities.
Because if you are unable to meet monthly mortgage loan payments, you will run the risk of defaulting on your mortgage, which will open up a whole other world of personal finance troubles.
Home loan defaults occur when mortgage borrowers repeatedly cannot come up with the funds to meet recurring payments and were a huge contributor in spurring the 2008-2009 financial crisis.
Let’s understand how you can default on a mortgage and what really happens once you do.
How Do You Default on a Mortgage?
When you are unable to meet monthly mortgage payments any longer, whether it is due to a lack of savings, job loss, or health issues, you can default on your mortgage. Home loan default can then lead to foreclosure shortly after.
While mortgage default procedures will vary by state, you typically have a 30-day grace period after missing your monthly mortgage payment before you officially break the default threshold. This grace period is most often extended to homeowners that are already experiencing financial difficulties.
After this 30-day period, you are usually given another 60 days before a mortgage lender will actually file a legal notice for default. So, 90 days is typically the time period from when you miss the monthly home loan payment to the time when the mortgage lender takes official action.
The legal notice from the mortgage lender will be a demand letter for all payments and penalties associated with the missed home loan payments. The mortgage default letter will be sent to you in the mail, in addition to getting filed in the court system.
Default is not just limited to mortgages, but home equity loans well. In addition, some homeowners will actually use a mortgage default strategically, even if they have the funds to meet monthly payments. A strategic default is typically employed when the amount still owed on the mortgage loan is greater than the current value of the home since even a sale of the home would still mean you owe money to the home loan lender.
However, strategic mortgage defaults are treated the same as regular defaults in terms of the negative consequences associating with defaulting on a mortgage.
What Happens Once You Default on Your Mortgage?
The process that occurs after a mortgage default is often a drawn-out one, but ultimately one that will lead to foreclosure if the predicament isn’t remedied before that point.
As mentioned above, a homeowner will typically have at least 90 days after missing a monthly mortgage payment before the home loan lender takes legal action and begins the default process that ends with foreclosure. It is entirely possible that a mortgage lender gives you more than 90 days before getting the foreclosure process underway.
So, it will begin with the mortgage lender sending you a notice of default in the mail, in addition to filing this notice with the courts. Usually contained within this default letter is a notice of sale, which will provide you with the date that your property will be sold if you do not remedy the situation.
How would you be able to remedy the mortgage default before falling victim to foreclosure? First and foremost, the lender will give you the opportunity to repay all mortgage debts owed, in addition to any associated late fees. If you are able to do this, your mortgage will be reinstated.
You may also be able to contest the default notice with the court where it was filed. Other potential remedies besides repaying all debts owed and contesting the decision in court include consulting a mortgage broker to reach a compromise with the lender, or filing for bankruptcy to halt the default process for at least a few months.
But, if none of these options work, foreclosure is inevitable. Your mortgage lender will give you a notice of sale, which will inform you on how much time you have to vacate the home. Typically, the time you have to leave the home can be anywhere from five to 30 days, but can be as long as 180 days.
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