A mortgage is a real estate lien on an individual’s property, called a borrower, placed by a financial institution or band, called a lender, providing the funds to purchase the property. Mortgages include two documents, a promissory note and a deed of trust.
A promissory note acts as a contract that states that a borrower agrees to repay the lender for the money they borrowed in addition to the interest amount that was agreed upon. Promissory notes hold borrowers responsible for repaying their loans, even if the borrower sells their property.
The deed of trust acts as a lien against the property. If borrowers do not repay their loan, their lender can force repayment through foreclosure.
The deed of trust also guarantees that the lender will get their money back, even when a borrower fails to pay it back. Many different types of mortgages are differentiated by their repayment terms.
Borrowers must choose the right mortgage for their financial needs to avoid repayment disputes and ensure stability. A potential borrower will be required to submit an application containing the following details to obtain a mortgage to purchase a property:
- The value of their current assets and debts;
- Their employment history and current income;
- The source of their down payment; and
- Their credit history and credit score.
What Are Mortgage Defaults?
A mortgage default occurs when the borrower fails to make one or more mortgage payments. After a certain period of time, a mortgage loan may go into default status.
Once this occurs, the lender can take action to take over the property at issue. In other words, a mortgage default jeopardizes the borrower’s ownership of their property unless they can take some action to remedy the default status.
How Long Can You Not Pay Your Mortgage Before Foreclosure?
The amount of time a borrower may go without paying their mortgage before foreclosure occurs is not always straightforward. A borrower needs to carefully review the terms of their mortgage agreement to determine whether or not there is a grace period for missing a payment.
Once the borrower fails to pay their mortgage, the lender has the right to start foreclosure. This is the process by which the lender takes possession of a property because the borrower defaulted on their mortgage payments.
Once the foreclosure process is complete, a lender typically sells the property at a public auction and uses the sale proceeds to recover their losses. If the property sale does not earn enough to cover what the lender is owed, the borrower may be required to pay the difference.
This is called a deficiency judgment because the money recovered from the auction or sale of the property was insufficient to cover the loan amount. Generally, a foreclosure begins after three months of nonpayment and after the borrower has been notified of the default.
It is important to note that proper notification will differ depending on the state. Because of this, an individual needs to ensure that they are properly notified.
The notice sent to the borrower will typically claim that they have become delinquent in their payments and, therefore, the lender has a legal right to repossess the home. However, once the lender begins the foreclosure process, the borrower may be given a grace period to repay the missed payment.
The length of the grace period will depend on the state’s laws unless it is otherwise provided in the mortgage agreement.
If a borrower does not pay their mortgage by the end of the grace period, a lender may report the borrower to the credit bureau. This may cause the borrower’s credit score to go down.
In addition, it will appear on their credit history.
Are There Any Legal Consequences for Mortgage Default?
Depending on the circumstances of the case, a mortgage lender might be willing to work with a borrower to make up for the missed payments. In many cases, however, mortgage default leads to serious consequences.
Some examples of the consequences an individual may face include:
- Foreclosure: Foreclosure is the sale process in which a property is sold at a public auction to satisfy the debt owed to a lender from a borrower. The proceeds from the sale of the property are given to the mortgage company to make up for lost payments;
- Other property liens: The lender may file a lien on other properties the borrower owns to make up for missed payments. If the borrower sells or refinances a property with a lien attached, the lender maintains the right to be paid out of the proceeds from the sale of the property; or
- Affected credit score: Most mortgage companies will generally send a notice to the borrower’s credit company that informs them of the default. This could immediately and negatively impact the borrower’s credit score, which may affect the borrower’s ability to do things in the future, including:
- Securing future loans;
- Leasing housing; and
- Other issues.
An individual may have their wages garnished to make up for missed payments. The garnishment process begins when a court orders a borrower’s employer to take a portion of their paychecks to be sent to the court or to an agency that processes debt payments.
The income withheld from their paycheck is then applied toward the missed mortgage payments. Some lenders will, in some cases, agree to new debt arrangements to avoid court interference.
What Factors Could Lead to a Mortgage Default?
Borrowers may default on their mortgage for many different reasons. A mortgage default may be caused by reasons such as:
- A miscalculation of the individual’s earning capacity or bank account funds;
- A miscommunication that occurred between the borrower and the lender; or
- One party misunderstood the terms of the real estate contract.
As noted above, there are different types of mortgages. Selecting the type of mortgage best suited to an individual’s financial needs is important.
If the borrower breaches their contract with their lender, the lender is granted the right to sue for damages. Mortgage fraud is another issue that may lead to a mortgage default.
Fraud arises when a borrower intentionally provides false information to obtain their mortgage or a rate they wanted. This may eventually lead to a mortgage default because the individual likely cannot maintain the falsehoods they presented.
Do I Need an Attorney for Mortgage Defaults?
It is a serious matter to default on a mortgage. It may lead to losing your home.
If you have any mortgage issues, you should consult with a mortgage attorney as soon as possible. Your attorney can help you understand the terms of your mortgage in addition to whether any defenses are available in your case.
Having a lawyer who can help you determine the best course of legal action in your case can give you the best chance of keeping your home. If you do have to go to court, your lawyer will represent you.