I’m a Real Estate Agent: Here’s What Happens When You Miss a Mortgage Payment and How To Get Back on Track

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Losing the ability to keep up with your mortgage payments due to a job loss, illness or other misfortune can put you into foreclosure on your mortgage. If that has happened to you — or you are close to the edge — you probably have a lot of questions about what comes next. 

GOBankingRates reached out to a real estate agent to get their take on what really happens when you default on your mortgage and ways to get back on track. So that you can better know what to expect to happen when you default on a mortgage loan — and understand your options — take a look at the following information.

How Does a Homeowner Default on a Loan?

“Defaulting on a mortgage can be a daunting experience for any homeowner. It occurs when the borrower fails to make payments on their mortgage loan, leading to a breach of the loan agreement,” says Adie Kriegstein, a licensed real estate salesperson at Compass Real Estate.

It’s also important to realize that the definitions and procedures for defaults and foreclosures vary from state to state.

“When a homeowner defaults on a loan, the lender has the right to take legal action to recover the outstanding debt,” explains Kriegstein. “It is important to make every effort to avoid default by making timely payments and seeking assistance if necessary.

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“If you do find yourself in a situation where you are unable to make your mortgage payments, it is important to seek professional advice and explore all available options before making any decision, as defaulting can have serious consequences for homeowners.”

And although a homeowner is technically in default much sooner, most banks or lenders will not file a notice of default, along with a demand letter for all payments and penalties, until 90 days after the borrower misses their mortgage loan payment.

It’s possible to default on home equity loans or home equity lines of credit, too. But whether or not the lender decides to pursue a foreclosure gets complicated, based on a number of issues, such as the amount of equity in your home, the amount of your first mortgage and other factors.

Some people actually default on their homes willingly. This is referred to as a strategic default.

What Really Happens When You Default on a Mortgage?

When you default on your mortgage, it starts a chain of events that can lead to foreclosure. However, it’s often a slow and drawn-out process, during which you have plenty of chances to resolve the issue through such actions as loan modifications, making up missed payments or consulting a mortgage broker.

“The consequences of defaulting on a mortgage can be severe,” warns Kriegstein. “The lender may initiate foreclosure proceedings, which can result in the homeowner losing their home. Foreclosure is a legal process in which the lender takes possession of the property and sells it to recover the outstanding debt.”

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“The proceeds from the sale are used to pay off the mortgage, and any remaining balance is returned to the homeowner,” Kriegstein continues.

Depending on the state you live in, notices of default might also include a notice of sale, declaring the date on which the property will be sold. Upon this initial notice of default, you will have the chance to reinstate your mortgage by making any and all payments, including late fees, due.

Once the foreclosure is complete, the time you have left before you must vacate the home varies by state and lender. Sometimes, it can be as little as five to 30 days. But other times, 180 days can go by before a notice of sale is sent. Remember, banks are in the mortgage business, not the home-selling business — so they want you to re-establish your mortgage.

Also, you can file for bankruptcy at any time and stop the entire process for another couple months.

What Happens to Your Credit?

Whether you file for bankruptcy or not, defaulting on your mortgage will adversely affect your credit.

“In addition to losing their home, defaulting on a mortgage can also have a negative impact on the homeowner’s credit score,” says Kriegstein. “Late payments and missed payments can stay on a credit report for up to seven years, making it difficult for the homeowner to obtain credit in the future. A low credit score can also result in higher interest rates on future loans and credit cards.”

Another vital thing to know is whether you have a recourse or non-recourse loan. In both cases, the lenders are allowed to seize the asset that’s used as collateral for the loan — in this case, your home. However, with a recourse loan, the lender is also allowed to go after other assets as compensation for any amounts the sale of the home does not cover; the lender can come after your other property or sue to garnish your wages.

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What Should You Do If You Can’t Make Your Payment?

“It is important for homeowners to understand that defaulting on a mortgage should be avoided at all costs,” Kriegstein cautions. “If you are struggling to make your mortgage payments, it is important to contact your lender as soon as possible. Many lenders offer assistance programs for homeowners who are experiencing financial hardship. These programs may include loan modifications, forbearance or repayment plans.”

It goes without saying that if you can avoid it, you don’t want to fall into default. So, if you’re struggling to keep up with your mortgage payments, it’s important to open lines of communication with your lender. Together, you might be able to find a workable solution that allows you to keep your house and your credit.

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Terence Loose contributed to the reporting for this article.


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