Mortgage default, explained

Just like everything in life, your personal circumstances are constantly changing — and sometimes that impacts your financial health. If you're experiencing changes with your finances, this might affect your ability to make payments on your mortgage. In some cases, your mortgage may have already been affected and you’re at risk of a mortgage default. Although defaulting on a mortgage sounds scary, there are resources to help you get back on track and potentially avoid the distress of foreclosure.

What does it mean to default on mortgage?

Defaulting on your mortgage generally means breaching the terms of your mortgage contract, most commonly due to missed payments. Although your mortgage doesn’t usually go into immediate default after one missed or reduced payment, failure to make payments without prior authorization from your lender can lead to a breach of contract.

While every situation is different, you’ll typically receive a notice of default from your lender after a certain period of failing to make your monthly installments. The notice of default typically explains that if the lender doesn’t receive payment by a certain date, your home may be in danger of foreclosure.

What are the consequences of a mortgage default?

There are two common consequences of a mortgage default:

• Accelerating the debt
  Accelerating the debt is when your lender requires that you pay off the loan immediately under certain conditions specified in your loan documents. Your lender will typically send a warning letter before accelerating the debt.
• Foreclosure
  If the conditions are not met, then your lender may begin foreclosure proceedings after required notices are sent and according to your state law. Foreclosure is when the lender goes through legal proceedings to acquire title to the property. Foreclosure laws vary by state, so be sure to check the rules for notices and timelines where you live.

Resources for avoiding a mortgage default

If you’re at risk of defaulting on your mortgage, or you’re already in default, you should communicate with your lender about potential steps to take. You may want to explore any mortgage assistance that may be available and other ways to help mitigate the consequences of defaulting on a mortgage.

Before officially defaulting on your mortgage:

If you're noticing a strain on your finances and are at risk of missing mortgage payments, there are preventative measures homeowners can take. Whether it's tapping into your savings, finding another stream of income or asking someone else for help, this might be a good time to re-evaluate your financial situation.

Consider speaking with your lender if you foresee issues with your mortgage payments going forward. Communication can be essential in these situations. You may want to share relevant information about your financial struggles, what you see as a feasible payment schedule and where you see possible issues down the road. Knowing this information will help give you and your lender the opportunity to consider potential payment plans.

Mortgage modification

If you’ve already missed a payment or two, a mortgage modification may be an option. A mortgage modification adjusts the terms of the homeowner's loan to bring the account current, and may provide a lower monthly payment.

If you've already defaulted on your mortgage, you may want to consider exploring:

• Reinstatement
  A mortgage reinstatement plan typically involves making one lumpsum payment that brings your mortgage current and back into good standing.
• Repayment plan
  A repayment plan is sort of like a catch-up plan. You make regular payments to your mortgage, plus a portion of what you owe until it's paid back in full.
• Forbearance plan
  A forbearance plan is an agreement between you and your lender, in which your lender freezes or reduces your mortgage payments for a specified amount of time, allowing you the opportunity to build up your finances and resume payments when the forbearance period is over.
• Short sale
  A short sale is when you sell your property for less than what you owe on the mortgage or less than market value to make a quick sale and relieve your debt. It avoids foreclosure proceedings. There may be tax implications so consult a tax advisor.
• Deed-in-lieu
  A deed-in-lieu allows you to transfer the title of your property to your lender instead of going through foreclosure proceedings. Note that there may still be credit implications for a deed-in-lieu.

In summary

Although defaulting on your mortgage can be a stressful event that you want to avoid, there are options to explore with your lender for moving forward when you find yourself facing financial strain. Communicating as early and as often as possible about any financial hardships that may affect your mortgage payments can give both you and your lender the opportunity to come up with a workable solution that helps protect your home.