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Mortgage Delinquency: What to Do & How to Fix It

No one ever buys a home expecting to go delinquent on their mortgage payment. However, various economic and financial crises may come up in one’s life, which may cause delinquencies to occur. During the housing market crash between 2007 and 2009, mortgage delinquency was all too common, which eventually led to millions of homes falling into foreclosure.

Even when the financial world isn’t collapsing, mortgage delinquency is an economic problem far too many homeowners deal with. Let’s explore mortgage delinquency in greater detail.

What is a Mortgage Delinquency?

Simply put, a mortgage delinquency is when the homeowner is late or has missed paying the monthly mortgage payment.

The Consequences of Delinquent Mortgages

Falling behind on your mortgage payment has a long list of consequences. These consequences include:

  1. Late fees. If you’re late on your mortgage, expect the lender to charge you a late fee. The late fee must be established in the language of your individual loan in the promissory note. Some lenders may charge a flat fee of around $50 and other lenders may charge a percentage, for example, 2% of the overdue principal and interest.
  2. Negative impact on your credit score. Not paying bills on time can quickly lower your credit score. Keep in mind, it’s easy to hurt your credit score but significantly more challenging to repair it!
  3. Eventually the lender can bring an action for foreclosure. This is devastating, both emotionally and financially for the homeowner. Losing your home will present horrific challenges to overcome, and it will make getting approved for a home or a loan significantly more challenging in the future.
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How Far Behind on a Mortgage Until Foreclosure?

Generally speaking, homeowners have to be past due on their monthly mortgage payment by 120 days before the foreclosure process can begin. That doesn’t mean the homeowner gets a free ride for the first 120 days. Missing payments, or being late on payments, may still have a negative effect on your credit or payment history.

What does it mean to be foreclosed on?

Having your property foreclosed on is a legal process to enforce the interest the lender has in the property. The end outcome is the mortgage company will obtain ownership of your property.

This is a time consuming process and oftentimes foreclosure is the last step a mortgage company would like to take. The reality is, mortgage companies do not want their loans to go into foreclosure. It costs the mortgage company a lot of time and money to go through this legal process, and they do not want to be in the business of owning physical real estate.

Consequences of a Foreclosure

Nobody wants to experience a foreclosure. Not only is a foreclosure painful emotionally and financially, the consequences of a foreclosure will linger for quite some time.

Defaulting on any loan is never a good thing for your credit, especially a loan as large as a mortgage. Foreclosure is typically the last resort a bank will take, which highlights the various other programs and offerings the bank tried to press forward before taking ownership of your home.

Additionally, if you ever wanted to buy a home again, the foreclosure will be evident on your financial history for seven years! Even if you were to improve your financial situation and credit score following the foreclosure, it may take you at least seven years before a bank is even willing to discuss mortgage options with you.

Finding a place to rent may be challenging as well. If the landlord does a financial background check, and many of them do, the foreclosure will stand out like a sore thumb. The landlord may require an additional security deposit or may choose not to rent their property to you.

How to Avoid Foreclosure

Considering how damaging a foreclosure can be for you or your family, it’s important to understand how you can avoid ever experiencing a foreclosure.

First and foremost, buy a house that’s well within your budget. Remember, the amount of money you are approved for when you initially applied for your mortgage does not mean you need to spend that much money! For example, if you were approved to spend $500,000 on a mortgage, there’s nothing stopping you from spending $375,000. Buy a home that is well within your budget.

Secondly, if you find yourself in a tough financial situation, contact your mortgage company immediately. It’s best to stay proactive on the matter. If you lost a job, or have a medical issue which is preventing you from working, contact your lender to see if they offer any forbearance or forgiveness programs. Many lenders will work with you if the communication is proactive.

Thirdly, keep that communication frequent. The lender may send you mail, emails, or even try to reach you on the phone. Do not ignore their contact. Keep them updated as to what’s going on.

Last but not least, begin to look at some of the assets you own and try to sell them. For example, if you own a boat or a ‘weekend car’, it is likely in your best interest to part ways with the boat or additional car in order to generate some additional cash to pay your mortgage.

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How to Move on with Life After Foreclosure

If you have lost a home through foreclosure don’t give up hope! The worst thing you could do is develop a defeated mindset, and cascade that mindset into the rest of your finances. Life isn’t over if you experience foreclosure. The following are some tips you can use to help get back on your feet and find a new home.

Improving Your Credit Score

Improving your credit score is the best thing you can do following a foreclosure. Improving your credit score takes work, but it’s well worth it. Just because you lost your home doesn’t mean you should stop paying for all the other bills/debt you have in your life. That would just further drag down your credit score and make rebounding increasingly more difficult.

Pay all of your bills and debt on time. Do not rack up credit card debt and look to dial back your cost of living or lifestyle for the time being.

Live Within Your Means

Owning a home is a dream for millions of Americans! The last thing someone is thinking about the day they close on their home is falling delinquent on any mortgage payment. Delinquent payments can eventually lead to your house being foreclosed on. The best way to avoid this negative financial situation is to live well within your means. Make sure you’re purchasing a home that you can afford, and always be sure to have an emergency fund in place to help navigate any financial hardship.

 

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All material is presented for informational and educational purposes only and should not be construed as individual financial, investment, or legal advice or instruction. ZeroMortgage does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by ZeroMortgage. ZeroMortgage, its affiliates, and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. ZeroMortgage does not provide tax advice. Please contact your tax adviser for any tax related questions.

This page last updated: March 21, 2022