Mortgage Loan Delinquencies Explained

Loan delinquency is failure to pay a debt in the short term. There are generally three levels of delinquency: 30 days late, 60 days late and 90 days late. A loan is not usually served a notice of delinquency within the first 30 days. However, the terms of delinquency depend on the loan contract. Sub-prime or high-risk loans may move into delinquency much faster, which has many negative implications for the borrower. 

Credit Penalties

The initial penalty for a delinquent payment is a drop in credit score. This does not occur until the debt is 30 days late. If the debt is paid after 30 or 60 days, you can save a small amount of the impact of the credit drop. Any delinquency on a mortgage is taken seriously, however; so it is best to make the payment immediately if possible. If you have an adjustable rate mortgage, this credit score drop and late payment can result in an adjustment upward, costing you money in the long-run and not just the short-run.

Delinquency Notices

Once your loan goes unpaid for an amount of time specified in your loan contract, you will be served with a notice of delinquency. This is not necessary on some smaller loans. With large mortgage loans, though, the requirements to notify a borrower about delinquencies are much higher. You will receive the notice in writing, and you will be given a period of time to respond to the notice by making the payment. If you do not, a collections call may come your way, confirming you received the notice. Failing to respond to a notice of default is not a good plan to keep your home. Lenders are more willing to forgive small delinquencies or even grant longer grace periods if you respond immediately. 

Loans Approaching Default

Once a loan is delinquent for a long enough period of time, usually 90 days, the lender will begin to move the loan from delinquency into default. You will likely have a final chance to respond, which will again be issued in writing. If you do respond, document the response and any payment receipt to protect you from foreclosure. Once you have defaulted on the loan, you will begin to move through the foreclosure process. Any chance you have of rehabilitating the loan is lost once the foreclosure process starts. It is best to resolve the issue before this occurs. 

Default Alternatives

If you have extenuating circumstance, such as a job loss or severe illness, try getting a deferment granted on your loan to allow you to recuperate. When deferment is not enough, you may consider closing the loan through a short sale or loan settlement. These options can allow for a degree of loss mitigation for both you and the lender, and you may be excused some of your debt in order to prevent further losses. Trying each alternative before accepting foreclosure is important; a foreclosure is extremely damaging to your credit score and potential to get a future home.