What Happens when You Default on a Mortgage Loan?
When you default on a mortgage loan, you will find there are financial consequences that last for years. Defaulting on any loan will cause significant financial consequences, but mortgage loan defaults tend to have a larger impact because of their size and the importance of the asset. The default process will occur slowly, over the course of many months and sometimes years. The slow moving process gives you plenty of time to correct the problem.
Notice of Late Payments
You will receive a notice any time you fail to pay your mortgage payment on time. Your monthly payments will have a specific due date, and missing this by even a few days can cause the notice of late payment. Typically, your credit score will not drop until the debt goes 30 days past due. Once this happens, your credit score will begin to drop and it will drop even more if the debt goes 60 to 90 days late. If you miss more than one mortgage payment in this fashion, you may be contacted by an outside collections agency.
Debt Goes to Collections
When your debt goes to collections, your credit score will drop even further. The first thing you should do is verify the collections agency has the right to recover from you. You can submit a written request for the collections agency to verify the debt and the fact the lender has asked them to get involved. Once you do this, the collections agency cannot contact you further until they have fulfilled the request. This should give you enough time to locate funds to pay off the debt you owe. If you cannot pay off the debt, you need to begin contacting your lender or a credit consulting agency to learn about your options to resolve the issue.
Notice of Default
If you fail to resolve the issue in an appropriate time frame, your mortgage will go into default. You will receive a notice of default by mail, informing you of the actions you must take now to prevent the loss of your home.
In some cases, you can attempt to sell the home before the loan goes into default, and then use the proceeds to pay off the mortgage. You may also be able to sell other assets, like an automobile, to meet the requested terms. Settling the debt through an agency or a legal process is also possible.
Notice of Foreclosure
If you cannot come up with the funds to prevent the default, your home will go into foreclosure. The foreclosure process is a legal procedure that varies from state to state. You will have a period of time to remove your belongings from the home and locate another place to live. This period of time is rather short, and you will find yourself in a very bad position if this occurs. Furthermore, after a foreclosure, your credit rating will be damaged enough to make most landlords or lenders very wary of working with you. Many people end up living with family after a foreclosure because they have lost their most valuable asset and do not have the financial stability to get into another home.