A mortgage default is a situation in which someone is not making payments on his or her mortgage, and the loan is considered to be “in default,” meaning that the agency which holds the note can choose to take over the property. Defaulting on a mortgage can result in the loss of a piece of real estate, and it should be avoided at all costs. Even if the property is not lost to the bank, a mortgage default will drag down a credit score significantly, making it harder to negotiate with the bank or to secure credit for other loans in the future.
When a mortgage is issued, a monthly due date for payments is usually specified. Many mortgages include a grace period of one to two weeks, meaning that payments sent during the grace period will still be considered on time. After the grace period has elapsed, however, late fees will start to be levied. If more than 30 days after the due date go by, the mortgage is considered to be in default.
Once the bank determines that the 30 days has elapsed, it can send a notice of mortgage default to a credit agency, impacting the credit score immediately. Within weeks, the bank will usually retain the services of a credit collection agency in an attempt to get the homeowner's past due payments. This adds to the fees associated with mortgage default. Many banks will also insist on a full payment including late fees and collection fees to bring the homeowner current, and they will not accept partial mortgage payments when the mortgage is in default.
Within 60 to 90 days of the determination that the mortgage has defaulted, the bank will send a notice of mortgage default to the homeowner. This is the first step in foreclosure proceedings, giving the property owner a chance to make up the missed payments immediately and in full, or to risk having the property taken over by the bank and sold at auction. The bank will also be obliged to post a public notice about the foreclosure, and the property owner will have a chance to buy the property back during the foreclosure auction, if he or she can muster up the funds in cash.
Some people choose to default on their mortgages and simply walk away, deciding that the negative impact on their credit scores is better than sinking any more equity into the home. This is most common in areas where property values have declined radically, leaving people with loans which are larger than their homes are worth. Other people may try to sell their homes before their mortgages go into default so that they can wipe the slate and start over again.
For homeowners who think that they may be risking mortgage default, the best thing to do is to talk to the lender. Ignoring payment notices, phone calls, and legal notices is not advisable, because the bank will refuse to negotiate with property owners who have not been proactive. The minute a property owner thinks that a mortgage payment will be missed, he or she should contact the lender to negotiate. Many lenders are willing to offer a longer grace period, or to permit reduced payments due to financial hardship to avoid mortgage default, as the bank would rather not deal with the hassle of a foreclosure auction. A history of paying on time and handling the mortgage responsibly will make the bank more likely to cooperate.
