Mortgage Default: What Does It Mean?

If you don’t make your mortgage payments for a few months in a row, you will receive a message from your mortgage lender regarding the mortgage default. But what does mortgage default mean, and is it still possible to rectify the situation?

Let’s take a look.

What Is Mortgage Default?

A mortgage goes into default whenever a homeowner fails to uphold any of the terms of their mortgage or deed of trust. In most cases, this means they missed one or more mortgage payments.

Technically, a default occurs after the first missed payment. In most cases, your lender will contact you to figure out what happened before officially marking your mortgage as default.

You can also go into mortgage default if you make illegal modifications to your home or break other terms set in place in the mortgage agreement. In any case, if you don’t make your monthly payments on time, your home loan will go into delinquency, which can impact your credit report and property taxes.

What Are the Consequences of Mortgage Default?

Depending on the extent of your mortgage default, you might face one or more consequences. These can include:

  • A lender might accelerate your debt. For instance, if you are 30 days past due on your last mortgage payment, your lender might demand payment on the outstanding balance by leveraging an acceleration clause in the mortgage. In other words, they will demand that you pay back everything you owe or face even more consequences.
  • Your home could go into foreclosure. Most lenders go through the pre-foreclosure process first, but all lenders can eventually force your home into foreclosure if you don’t pay back the money you owe. Federal law typically requires lenders to wait 120 days before they can start the foreclosure process. If the foreclosure process is completed, the lender will take possession of the property, and you’ll have to move out.
  • Your credit score will likely suffer significantly. The more payments you miss and the longer your mortgage is in default, the lower your credit score will go.

How Can You Avoid Mortgage Default?

On the bright side, you can avoid defaulting on your mortgage in several ways. Taking proactive steps can do wonders for maximizing your overall financial health.

Refinance Your Loan

When you refinance your loan, you take out a new mortgage either with the same lender or a new lender. Ideally, your new mortgage will have better terms and conditions so you can make your mortgage payments on time and more consistently.

When you refinance your loan, the new balance pays off the remaining mortgage balance of your initial loan. Then, you make payments toward the new loan balance. Refinancing your loan is most appropriate if you have a higher credit score and a good relationship with one or several lenders. Just keep in mind that you may need to pay closing costs on the new loan.

If you can’t refinance your real estate loan outright, your lender may agree to a short sale or repayment plan. Either of these can reduce the impact the credit bureaus show on your credit score, plus help you escape financial hardship in the short to medium term.

Try a Loan Modification

Alternatively, you can pursue a loan modification. With a loan modification, you may change your interest rate, the term of your loan, or other loan elements.

Like refinancing, loan modifications are appropriate if you have a good relationship with your mortgage lender. This fact touches on an overall principle you should keep in mind— your lender doesn’t want you to go into default. In most cases, your lender will be willing to work with you to ensure you get the financial wiggle room you need to thrive.

If it will help you avoid loan default, your lender may agree to let you make a lower monthly mortgage payment for a certain amount of time. It depends on your mortgage contract and whether you have homeowners insurance. In addition, if you are only a few days delinquent in your loan, your lender may be more willing to work with you through a modification to avoid foreclosure proceedings.

Ask for Forbearance

A forbearance is a momentary delay in your mortgage payments that you can work out with your lender. For example, they might agree to postpone mortgage payments for a few months while you work through financial difficulties, essentially extending the grace period mortgages typically include. Then, you'll have to pay back all the mortgage payments you previously missed by the end of the year or another due date.

Mortgage forbearance could be a good way to get through short-term financial troubles if you know you’ll have enough money to repay the missed payments you owe later.

Offer a Deed in Lieu of Foreclosure

If all else fails, you can offer your mortgage lender a deed in lieu of foreclosure. Doing this gives your lender the deed to your property with no strings attached in exchange for them not pursuing foreclosure.

The advantage is that you’ll have a lower credit score hit to deal with. You’ll also be able to move without the fuss of a full foreclosure. Still, this is far from ideal.

Co-Ownership With Balance

If common mortgage default avoidance advice or recovery options won't fit your financial situation, home co-ownership with Balance may be the ideal solution.

If you’re approved, Balance will pay off your mortgage to become a co-owner of your property, gaining a stake in your home's future equity. In exchange, we may pay you a lump sum in cash for the equity we purchase. There's no minimum term, so when you're ready, you can exit the co-ownership by refinancing or selling the property and keeping your share of the proceeds.

In the meantime, you can use that money to pay off your debts or an emergency medical bill. All the while, you remain an owner of your property, and you don't have to move your family to a new place.

Contact Balance Today

All in all, Balance could be the best way for you to get out from under the specter of mortgage default. When you speak to one of our representatives, we’ll discuss your options and ensure that home co-ownership is the right choice for your needs. Contact us today!


Mortgage Default: What It Is and What It Means | NerdWallet

What You Need to Know About Mortgage Default | Experian

Do Mortgages Have a Grace Period? | Experian

Mortgage Default, Fully Explained | Chase