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What is a Mortgage Default?
Mary McMahon
Mary McMahon
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.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...AS FEATURED ON:
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![When a mortgage becomes in default, the holder of the note can take ownership of the property.]()
By: Brian JacksonWhen a mortgage becomes in default, the holder of the note can take ownership of the property. -
![Some homeowners choose to default on their mortgage, despite the detrimental effect on their credit status.]()
By: bmakSome homeowners choose to default on their mortgage, despite the detrimental effect on their credit status. -
![Credit history is one indicator that determines a lender's assumption of probability of default.]()
By: karam miriCredit history is one indicator that determines a lender's assumption of probability of default. -
![Defaulting on a mortgage usually results in the seizure and sale of a home.]()
By: Andy DeanDefaulting on a mortgage usually results in the seizure and sale of a home.
Discussion Comments
Is there any way that we may be able to avoid mortgage defaults in our financial life aspects? How will it affect my credit history if I am ever not able to pay the loan or at least its interest?
My parents left me their house but the will is from 2001. i don't know who to contact. i just found out last week the house is in foreclosure and goes up for auction in a few days. The only person i talked to was a realtor for Banks of America and he said i would be financially responsible if the second mortgage was not paid off from the short sale. Now am i too late? Can anyone help?
CARE handled my short sale - they worked with all of my lienholders, my listing agent, the selling agent, buyers and the closing title company. When they had my short sale approved I owed nothing at closing.
Would someone with knowledge of defaulting mortgages explain what was occurring with the MBA and their building in Washington DC?
Subwayy11- I agree with you that residential mortgage default rate is a problem. According to FHA, their mortgage default rate was 9%.
This meant that 9% of borrowers missed about three mortgage payments. This is up 3% from the year before.
I just want to add that the mortgage default consequences are great. Once a mortgage is in default for thirty days, your credit already has been adversely affected. The lower the credit score the more expensive it will be for you to borrow money.
This is a huge problem when you consider finding a home whether it is bought or rented requires the use of credit as well as buying or leasing a car.
A home and a car are necessities and for those with mortgage defaults or even foreclosures it may be harder to find that next home due to your credit circumstances.
This is why many banks are offering mortgage default insurance which covers the mortgage payments in the event you lose your job and can not pay.
SurfNturf-
I agree with you. I was looking to purchase a short sale on a condo a few years ago. The condo price was set at $200,000 which is what we offered. The seller was thrilled especially since we were approved with the same bank that the seller had his original mortgage with.
Well, after six weeks of waiting the bank came back and said that they would accept a short sale only at a $270,000 selling price. I decided that it was better to buy a foreclosure than continue with this or any other short sale.
Short sales do have a happy ending for some, but the seller also had a second mortgage default which was another problem.
In this situation, the first mortgage gets priority and then the second mortgage gets paid.
In this example, the two mortgages were held by two different banks which was part of the problem when it came down to clearing the debt. Essentially that is what short sales do; they clear debt for the seller so they can move on. However, a second mortgage is a recourse loan, so the lender can foreclose and still seek payments owed
I just wanted to add that there is foreclosure help for those with loan defaults. Many banks have a mitigation department that works with homeowners who have trouble paying their mortgage.
Some options include a revamped payment plan, while the other alternative is to offer a short sale. A short sale is when the properly is sold for less than the loan value. This has to be approved by the bank.
Many shorts take weeks for the banks to even consider the option. What often happens is a seller and a realtor set the price of the home very low to attract buyers. Once they have a buyer than the bank will consider the possible short sales.
Often after several weeks of waiting, the bank usually comes back and rejects the short sale offer and says that they seek a higher offer. The buyer then decides to forget about this property and look at another one and now the seller has to find a new buyer with the new price that the bank is willing to accept.
Short sales are another option for struggling homeowners, but it is not without its frustrations.
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