What Is a Default on a Mortgage?

A Guide to Mortgage Default and Tips to Avoid It

A mortgage default occurs when you fail to follow the terms of your mortgage agreement.

While you can default in several ways, including not paying property taxes, the most common way homeowners default is by not making payments. Default can have serious consequences, including foreclosure.

This guide will explain what a mortgage default is, the consequences of defaulting on a loan, and what options you have if you are at risk of default on a mortgage.

What Does It Mean to Default on a Mortgage Loan?

Defaulting happens whenever you fail tomeet loan agreement terms. A housing loan default could include:

• Not paying your mortgage
• Not paying your property taxes
• Not maintaining homeowners insurance coverage

Failure to pay your mortgage is the most serious reason for mortgage loan default. It can trigger your lender to take drastic action, including accelerating the loan and eventually foreclosing on the home.

Other violations can also prompt action on the part of your lender, such as buying force-placed insurance if you don't have the required minimum insurance coverage in place.

Mortgage Default vs. Delinquency

You may hear different terms when you fall behind on payments, so it is important to know the difference between default vs delinquency.

Mortgage delinquency occurs as soon as you miss a payment on a home loan. While your lender may have a grace period, missing even a single payment deadline technically makes you delinquent.

Delinquency can usually be resolved by making the missed payment. However, if you are delinquent for a long time, usually several months, your extended failure to fulfill the mortgage terms puts you in default on your agreement.

While the penalties for delinquency usually include late fees and potentially a notation on your credit report, the consequences of a mortgage default are more serious and can include foreclosure.

Mortgage delinquency rates peaked in the aftermath of the 2008 housing crisis but have been steadily declining over time except for a short spike in 2020, according to the Federal Reserve Bank of St. Louis.

What Happens When You Default on a Mortgage?

There are very serious mortgage default consequences if you stop paying your home loan.

Your credit score will decline when the default is reported to the credit reporting agencies. Your lender will likely accelerate your loan or require you to pay the entire balance up front. Your lender may also initiate foreclosure proceedings, which means the lender might sell your home to pay the debt.

Foreclosure Process

The foreclosure process can occur when you have a mortgage in default. This is a formal legal process in which your lender exercises the ownership rights you gave them when you took out the mortgage loan. Your lender has a lien on your home and can take and sell the property to pay back your debt.

The specifics of the foreclosure process vary by state.

Your lender may be required to provide a notice of default on a loan officially stating that you are in breach of your loan contract and have a short time to correct the issue. This time is called a catch-up period, and it may last around 30 days. During that time, you can make up missed payments and fees to come out of home loan default.

If you don't make payments or seek relief options, then foreclosure will move forward.

Financial and Personal Impacts

Mortgage default can have serious long-term consequences on your finances. Here are some of the financial and personal impacts of a housing loan default:

• Damaged credit score. Your lender will report your mortgage loan default to the credit bureaus. This can result in a substantial drop in your credit score.
• Higher rates. Damage to your credit and record of the default makes you a riskier borrower. You may have to pay higher rates on future loans because of your credit history.
• Difficulty getting new loans. Lenders review your credit report and borrowing history when deciding if you can borrow. A mortgage default is a major red flag that could mean you get denied for loans in the future.
• Trouble renting. Landlords also review your credit history when deciding if you are likely to pay rent on time. A mortgage loan default on your record will make landlords nervous about your ability to pay rent, so you may have more limited options going forward.
• Potential legal actions. Your lender could pursue court action to foreclose on your home. In some states, you also risk a deficiency judgment, which requires you to pay the difference between what the lender is able to sell the property for and what you owe.
• Possible fees. In most cases, you are responsible for late fees and added costs your mortgage lender incurs if you default on a home loan.

Steps You Can Take to Avoid Mortgage Default

If you’re at risk of falling behind on your payments, there are things you can do to avoid defaulting. Lenders have options for help, such as putting your loan into forbearance temporarily during a period of hardship or creating a repayment plan to make your loans more affordable.

The sooner you reach out, the more likely it is that you will have opportunities for loan modifications or refinancing. Don't hesitate to contact your lender immediately when you are worried about missing a payment.

Mortgage Loan Modification

Mortgage loan modification involves changing the terms of your mortgage to make it more affordable.

You may be able to work with your lender to lower your mortgage payments. For example, your lender might make your repayment period longer, or your lender may temporarily or permanently reduce your interest rate.

Lenders don't want to foreclose on a home, so most will help you look for a solution.

Forbearance

Forbearance allows you to temporarily pause payments on your home loan. Interest continues to accrue during this time, and you will eventually have to catch up on missed payments. This means your loan balance gets bigger while you are in forbearance, and you end up paying more in the end.

Despite this, if you are experiencing a short-term financial problem and can demonstrate to your lender that your payment issues are temporary, your lender may give you a break from payments to help save your home.

Short Sale

A short sale does not allow you to save your home, but it allows you to avoid a foreclosure on your record. A short sale involves selling the home for less than the remaining mortgage balance. Your lender agrees to accept the smaller amount to satisfy the debt.

This option can still damage your credit, but not as much as foreclosure. It is a good option when you know you will not be able to resume payments anytime soon, and a loan modification won't make your loan affordable to you.

Deed‑in‑Lieu of Foreclosure

Deed-in-lieu of foreclosure involves agreeing to voluntarily transfer ownership to the lender to avoid the foreclosure process. This process can save the lender money and is less damaging to a borrower's credit than foreclosure. Lenders may agree to this arrangement if you are unable to resume payments on your home.

Defaulting on Your Mortgage FAQs

If you still need more details, here are some answers to frequently asked questions about mortgage loans.

What Is the Difference Between Default and Foreclosure?

Default occurs when you are in breach of your mortgage loan agreement, usually as a result of not making payments for a long time. Having a mortgage in default can trigger the legal process of foreclosure, which involves a lender going to court to take your home to be sold for repayment.

How Long Does a Default Stay on My Credit Report?

When you default on a loan, the default usually stays on your credit report for seven years. During this time, the record of the default can lower your credit score and affect your ability to borrow.

Can I Get Another Mortgage After a Default or Foreclosure?

It can be difficult to qualify for a mortgage for some time after default or foreclosure. You should work on rebuilding your credit score by using debt responsibly. After you’ve improved your credit score and financial situation, applying for a government-backed loan, such as an FHA loan, may be the best way to get a new home loan.

Final Thoughts: Defaulting on Your Home Mortgage

Defaulting on your home mortgage has serious consequences, and you should try to avoid it by contacting your lender as soon as possible when you are in financial trouble. You can also avoid default by making sure any mortgage you take out is affordable.

Reach out to Freedom Mortgage to explore your loan options and get prequalified today for a home loan that is within your budget.