What is Mortgage Default? Everything You Need to Know

Last updated 03/20/2024 by

Summary:

In most cases, defaulting on your mortgage means that you failed to make sufficient repayments on your mortgage, which can result in many issues. These issues range in severity from impacting your credit rating to losing your home.

In this article, we will discuss what it means to default on a mortgage and the typical process involved. Defaulting on your mortgage will have financial consequences, such as a negative mark on your credit report, increased difficulty securing a future line of credit, or losing your mortgaged property. However, there are steps you can take to avoid defaulting on a mortgage, and ways to improve your credit if you do default.

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What is a mortgage default?

A default on a mortgage means that you failed to do one of these three:

Repay your loan according to the agreed schedule,
Pay real estate taxes, or
Pay for homeowner’s insurance.

The default terms vary depending on the type of loan and mortgage contract. Be sure to read the terms of these contracts to determine what qualifies as a default in your circumstance. Hopefully, you have a qualified mortgage, a mortgage that meets federal regulations that make it difficult to default on. However, you may still default, even on a qualified mortgage.

If your mortgage defaults, your credit lender will try to get its money back. The good news is that defaulting on your mortgage does not happen overnight. Before your mortgage goes into default, your credit lender will send you a default notice. In most cases, you will receive this notice after two to six months of missed or reduced payments on your mortgage. This notice will give you approximately two weeks to make the repayments you missed or to agree on a new repayment schedule with your lender.

If you can catch up on your repayments, your mortgage will not go into default. However, your credit report will reflect that you missed or reduced payments. If you cannot make these repayments in time, your mortgage will officially go into default. Once your account is in default, your credit lender can take action to get its money back. In the most extreme scenario, your credit lender may take you to court and repossess your home (this is known as foreclosure).

What is the difference between mortgage delinquency and default?

Delinquency and default both refer to borrower who miss payments on their mortgage. You become a delinquent borrower when you are late on a payment (even if it’s just a day or a week late). Being in default is more serious and usually requires you to miss multiple payments. In the case of most federal loans, you have to be at least 270 days late to be considered in default.

The table below shows the current rate of mortgage delinquency rate. Although these rates are historically low, the default rates would be much lower because they usually require borrowers to be delinquent for multiple months.

What happens if your home goes into default?

Now that we know what causes a mortgage default, let’s talk about what happens after the fact. In addition to impacting your credit score and potentially losing your home, here’s what to expect when you default on your mortgage.

Accelerating the debt

If you miss several payments, your creditor will likely let you know they intend to accelerate the debt if you fail to make the missed payments. In other words, they plan to send you a default notice if you do not repay accordingly. As mentioned above, your creditor may accelerate the debt anywhere from 2 to 6 missed payments. Once you are in default, the lender has the right to accelerate the loan, or “call the total amount of the loan due.” This means that they could start a foreclosure lawsuit.

Foreclosure

Foreclosure is the legal process where the lender sells your home to recoup the outstanding balance on your loan. The foreclosure process varies state-to-state and is subject to the conditions of the housing market at the time. For example, if foreclosures overwhelm the courts, the lender may wait longer before starting the foreclosure process.

Regardless, according to federal law, lenders have to wait at least 120 days, starting from the day of your first missed payment, before foreclosing. Some states require a judicial foreclosure, where the lender needs to first file a lawsuit before foreclosing. However, other states do not require a judicial foreclosure, so the lender can sell before starting a formal lawsuit.

In both processes, if the lender is successful in the foreclosure, your home will be sold at an auction. Depending on the price your home sells for, the mortgage lender has the right to sue you for the remaining amount. This amount (called a deficiency balance) also includes any late payment fees or other fees.

How to avoid mortgage default

If you recently received a default notice, don’t lose hope! Here are a few steps you can take to avoid defaulting on your mortgage.

Work on a plan with your lender

Your lender does not want your mortgage to default, to take you to court, or to repossess your home. If you expect to default on a payment, you should reach out to your lender immediately and be honest about why you are struggling to make the payment. By offering a clear understanding of your circumstances, your lender may have some suggestions for how to proceed. Reaching out to your lender also demonstrates that you want to rectify the situation, not ignore the issue altogether.

Then, you and your lender can work on a plan for repayment with the least amount of consequences. It’s important to know that lenders consider repossession a last resort and must consider all reasonable requests to amend your repayment schedule.

Forbearance options

You should also review a few forbearance options—options that alter the legal terms of your mortgage for a certain period—with your lender. Different lenders have different levels of flexibility, so you may both find an option that best suits your needs. Here are some options that you should discuss:

Suggest mortgage payment holidays, which refers to a period of months (typically 6-12) where you don’t have to make payments on your mortgage. In most cases, a minimum amount of your mortgage must be paid off to qualify for this option.
Reduce the monthly repayment amounts for a while.
Extend the term of your mortgage, which in turn reduces your monthly repayments.
Switch to interest-only mortgage repayments, where you only pay interest on the amount borrowed. At the end of the mortgage term, you repay the full amount left on your mortgage. One such example of this is a balloon mortgage.
Decide to remortgage, where you request a new mortgage deal with another lender or suggest an alternative different deal with the current lender

Attempt a short sale

If you anticipate a default, you could attempt to sell your home and pay off your mortgage using the sale proceeds. If you do not sell your home for the remaining balance of the mortgage, you could negotiate with your lender for a short sale. A short sale occurs when the lender accepts less than the mortgage balance. However, you could still be held responsible for the amount due. You should contact your lender to determine the terms associated with a short sale.

Deed-in-lieu of foreclosure

A deed-in-lieu of foreclosure occurs if and when the lender agrees to a transfer of ownership of the property. In these circumstances, the new owner will pay the missed payments and you will avoid a formal foreclosure.

Pro Tip

As soon as you make a late, missed, or reduced payment, get in contact with your lender. Any sort of irregular payment will impact your credit profile, which starts to limit your options. If you anticipate a missed or irregular payment, we recommend talking to your mortgage provider in advance.

How can I get a default removed from my credit report?

Unless there is an error with your default, you will not be able to get it removed from your credit report. In fact, it will take six years for a default to no longer appear on your credit report.

If you believe that a default is erroneous, you can ask a credit agency to change or remove it. After you submit your request, the credit agency will contact your lender for more information and confirm the accuracy of your request. At the end of the day, you cannot edit or remove the default without confirmation and permission from your lender.

Can you get a mortgage with a default?

A default will stay on your credit report for six years, starting the month that you stopped making repayments. You may have more trouble getting a mortgage with a default on your credit report, but it’s not impossible. However, once the mortgage is paid off and the default is removed from your credit history, your score and your ability to get a mortgage will improve.

When you repay the debt owed from the default, your lender will mark the default as “satisfied,” which looks better to lenders than an unpaid default. If external circumstances (a job loss or medical emergency) led to default, ask your lender or credit agency to add an addendum to your credit report explaining why the default happened.

What can I do in the meantime?

Until you can pay off the debt or have the default removed from your credit report, it’s a good idea to practice good money management. This means following your repayment schedule, paying off more than the minimum amount required, and tracking your credit report for errors.

Securing a mortgage with a default could mean that you have to pay a bigger deposit or will pay higher interest rates. You will likely qualify for a subprime mortgage. Moreover, recent defaults will have a greater impact on your credit score. If you can, wait as long as possible post-default to apply for a new mortgage to increase your chances and lower the negative side effects.

FAQs

How long can you default on a mortgage?

Under federal law, a creditor has to wait 120 days before they can foreclose your home. Thus, you have at least 120 days that you can default on a mortgage without the most severe consequence. However, the exact timeline depends on your lender and the current housing market.

How do I get my mortgage out of default?

To get your mortgage out of default, you must either repay the amount that you missed on your payments or agree to a new loan repayment schedule with your lender.

What is the difference between default and foreclosure?

A default is when you fail to make the appropriate payments on your mortgage. There are many different potential consequences to defaulting, one of which is foreclosure. Foreclosure is the legal process when the person with a mortgage loses the legal right to their mortgaged property.

Choosing the Best Mortgage for You

If you are in the process of securing a mortgage, we recommend these creditors to ensure your loan is reliable and has reasonable terms. For first-time homebuyers, take a look at these creditors. Securing a mortgage with a reliable lender is an important first step in avoiding a default.

Key Takeaways

Defaulting on your mortgage is not good for your financial future.
A mortgage default can have drastic consequences for your credit score and your ability to secure a future line of credit.
If you believe you will default on your loan, get in contact with your lender and establish a proactive plan.
If you do default on your mortgage, make sure to explore all your options and make the best financial decision for you and your future.

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