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. And although it’s true that the number of foreclosures in the U.S. is down from a year ago, it’s also true that there are still currently more than 900,000 homes in foreclosure, according to RealtyTrac, which follows the real estate and mortgage market.
If you’re part of — or close to becoming part of — that statistic, you probably have a lot of questions about what comes next. You might even be considering consulting a real estate lawyer. 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, including details from a couple mortgage and real estate experts.
How does a homeowner default on a loan?
First, it’s important to realize that the definitions and procedures for defaults and foreclosures vary from state to state, said Than Merrill, real estate investor, host of A&E’s “Flip This House,” and CEO and founder of FortuneBuilders, a real estate investment education company.
That said, following a 30-day grace period, which is typically put in place for those homeowners subject to short-term financial hardships, borrowers will officially cross the threshold into default, Merrill said. “Only then will the foreclosure process start to pick up momentum.”
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, said mortgage expert Bill Dallas, CEO and co-founder of cloudvirga, a company that helps simplify lending processes. This notice will come in the mail, but Dallas added that the lender is required by law to file it with the court system, too. “This is called the 90-day lis pendens (public notice) and can be extended by the lender,” said Dallas.
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, how much your first mortgage is, and other factors.
Some people actually default on their homes willingly. This is referred to as a strategic default. “A strategic default occurs when a borrower neglects to make payments even when they have the financial ability to do so,” said Dallas. He said this typically happens when the outstanding debt on the loan is greater than the worth of the home.
Therefore, even if the homeowner sold the house, they would still owe the bank money out-of-pocket. Unfortunately, strategic defaults come with all the same negative consequences as a default due to the inability to pay, so it should be a last resort.
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.
Merrill said the typical lender will begin the foreclosure process anywhere from three to six months after a homeowner fails to make his monthly payment. Then, it could take many more months before the actual eviction and auctioning off of the property. For instance, in California, Dallas said that foreclosures can take 18 months to two years to play out fully.
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, said Merrill. He also said that upon this initial notice of default, you will have the chance to reinstate your mortgage by making any and all payments and late fees due. You might also be able to contest the foreclosure request with the court where it was filed, said Merrill.
Once the foreclosure is complete, the time you have left before you must vacate the home varies by state and lender, said Merrill. Sometimes it can be as little as five to 30 days, he said. But other times, 180 days can go by before a notice of sale is sent, said Dallas. In any case, the lender must notify you that you must vacate the home, and tell you how long you have to do so.
During this time, it’s usually still possible to remedy the situation, said Dallas, by paying all missed payments, plus penalties. 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. “While not viewed with the same diminishing fervor as a bankruptcy, foreclosures are viewed as a glaring negative by lenders,” said Merrill.
The foreclosure will remain on your credit report for seven years and during that time, Merrill said that it will be very difficult to qualify for another mortgage. “At the very least, it will make it more difficult for homeowners to receive an attractive rate on their next home purchase,” he said.
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.
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.