Accounting & Finance
What Happens If Your Default On a Mortgage Loan?

When you apply for a mortgage loan, it’s usually hard to predict the unexpected. You could lose your ability to make your monthly mortgage payments due to an illness, job loss or other problem. When this happens, you’re likely to get a foreclosure on your home. In most cases, you and your lender will sign a loan agreement that stipulates everything, including consequences of loan defaults. But still, you need to understand your options as a borrower.
This post is going to cover some of the things that can happen when you default on a loan. Read on to learn more.
1. The Lender Will Notify You
When you’re late on any monthly payments, your lender will send notice of late payments. Keep in mind they charge fees on late payments. You’ll have a precise due date for your monthly payments. Most lenders usually deduct the percentage from your bank account every month. So, if any transaction fails to go through without any prior notification, you’re at risk of impacting your credit score.
If you miss making mortgage payments in two or more consecutive months, your lender may resort to using a debt collection agency. Needless to say, you have an obligation to determine whether the collection agency has a right to recover the payments from you. Upon submission of a written request for agency verification, they can’t contact you until they have confirmed the amount and the lender’s authorization.
This can give you adequate time to pay off the debt and prevent further complications.
2. You Can Get a Foreclosure
You’ll receive a notification via mail when you’re in default. In this case, the lender is allowed to start the foreclosure process. The foreclosure filing will increase the cost you’ll have to pay to ensure your account is current. Also, the filing will stay on your public record for years, making it hard for you to secure loans from lenders.
If you’re unable to get a solution to your problem or fix your account, your home will be up for sale at a foreclosure auction. In some states, there is a law known as a deficiency judgment. In this case, if the foreclosure sale fails to complete your outstanding debt fully, you’ll get a lien for further money.
The deficiency judgment is usually issued by the court only when the lender places a motion for it.
3. Your Credit Score Drops
While the effect on your credit may not be hard as that of bankruptcy, defaulting on your mortgage loan will affect your score, too. You’ll notice a drop in your score after the first 30 days of failing to make mortgage payments. It will drop even further if you fail to make your payments in 60 to 90 days. When a debt goes to a collection agency, your score is impacted.
Since the foreclosure filing will be on your public record, your credit score will tumble. This will make it hard for you to get attractive offers for your next home purchase. If you took a recourse loan, the lender is allowed to go after any other valuable property you own to settle the debt. This will significantly destroy your credibility as a borrower.
The Takeaway!
Dealing with a foreclosure or defaulted loan is the last thing you want to experience. If you suspect the possibility of being late on your monthly mortgage payments, it helps talk to your lender about other options or easing their terms. In this case, they can consider the suspension of payments, loan modifications, or repayment plants depending on your specific situation.
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