What Happens When You Stop Paying Your Mortgage?

If you’ve fallen behind on your mortgage payments, your lender will soon become proactive in taking steps to recoup their loss and prevent further losses.  Your mortgage undoubtedly requires a payment by a certain day of the month and includes a grace period for the payment.  If you don’t make your mortgage payment before the expiration of the grace period, a late fee will be assessed in the amount set forth in the promissory note you signed when you secured your mortgage.  Typically the late fee is 5% of the overdue payment of principal and interest.

A serious consequence of falling behind on your mortgage payments is the negative impact on your credit score.

When a mortgage payment is 30 or more days late, the lender will report that delinquency to the credit bureaus.

The more payments you miss and the longer you remain delinquent, the greater the negative impact on your credit score.

Most mortgages include an acceleration clause that gives the lender the right to call the entire mortgage debt due and payable immediately upon your default as the borrower.  Typically once you miss a few mortgage payments, your lender will send you a letter notifying you that you are in Default of your mortgage obligation and that if you don’t cure the default by a certain date, the lender intends to accelerate the loan as a precursor to foreclosing.

Under federal mortgage servicing rules, lenders can’t start the foreclosure process by their initial filing of a Complaint for Foreclosure until you are more than 120 days delinquent.  If your lender does initiate the foreclosure process, the terms of your mortgage likely allow your lender to pass on certain expenses to you including attorney’s fees and costs related to initiating and litigating a foreclosure case against you.

If you run into problems paying your mortgage, the biggest mistake you can make is to deny there’s a significant problem and bury your head!  Once you realize your financial troubles have escalated to the point that you’re going to miss a mortgage payment, you should begin exploring your options immediately.

If you’re having problems paying your mortgage, one option you have to avoid foreclosure is a mortgage loan modification.   A mortgage modification changes the terms of the loan agreement between a homeowner and a lender.  Typically the goal is to lower the monthly mortgage payments by lowering the interest rate, extending the loan term or reducing the amount of principal balance. Sometimes if the homeowner is already in default, the lender may agree to add any overdue mortgage payments to the outstanding principal (or back end of the loan).  The overdue payments can then be repaid over the term of the loan or in a single balloon payment at the end of the loan term.

Another option to avoid foreclosure is to complete a deed in lieu of foreclosure.  This is a negotiated settlement between you and your lender.  You voluntarily relinquish title to your house and your lender agrees to stop or forego the foreclosure.  As part of our deed in lieu of foreclosure negotiating, we aim to secure a written agreement from your lender to release you from having to repay any deficiency.  This is referred to commonly as a waiver of deficiency.  The deficiency in regards to a deed in lieu of foreclosure is the difference between the total debt and the fair market value of the house.

An additional option to avoid foreclosure is to do a short sale.  A short sale is a sale of a property for an amount that is less than is owed on the loan secured by that property.  The lender consents to accept less than the debt owed and to release its lien on the property. However, while the lender may agree to release the lien, it may not agree to accept the sale price as full satisfaction of the debt. In regards to a short sale, the deficiency is the difference between the sales price and the total indebtedness of the loan. Whether or not the lender can sue the borrower to recover the deficiency will depend largely on the terms of the short sale agreement. To ensure that there will be no litigation to pursue a deficiency judgment or right, we negotiate with the lender to include language in the short sale agreement that the transaction is in full satisfaction of the debt!