The worst fear of any homeowner is defaulting on their mortgage. Not only does it result in the loss of the most valuable asset most people eve have, but it also leaves them unable to get another mortgage loan for years. Worse, it leaves a mark with the credit reporting agencies that can cause a host of unpleasant issues. These include the inability to secure new credit, increased interest rates on existing credit, and in many cases, employers are reported to refuse hiring those with poor credit (irrespective of the law).
However, the last thing a lender wants to do is foreclose on a mortgage that is in default. This is because the costs associated with foreclosures are generally far more than the lender is likely to recover on the sale. Even when they do recover their costs, any excess funds from the property sale and associated foreclosure fees are returned to the homeowner. The lender loses the additional interest they would have gained, and also loses a customer. It’s in no way a winning situation for the lender, which is why they are willing to do quite a bit more than they advertise to help a homeowner avoid defaulting on their mortgage.
Why are home loans defaulted on if lenders are willing to work so hard to prevent foreclosure?
The simple answer is that the homeowner stops communicating. This is often due to a fear that the lender isn’t there to help the homeowner, but rather to prey on them. In most cases, nothing could be farther from the truth. Lenders want to help, but in order to do so they need communication from the homeowner.
Too often, homeowners who are about to default on a mortgage are overwhelmed with their circumstances. Many times they can be depressed too, as losing a home is never a pleasant experience. These factors, and popular myths claiming that lenders steal homes, contribute to people being unwilling or just mentally unable to communicate with their lenders. Without communication, there is nothing a lender can do other than to foreclose on a default mortgage.
So, what actually happens if you default?
After about three months of not paying our mortgage or contacting the lender to make alternate arrangements, your loan will be turned over to an attorney. When this happens, there is usually no way to save the mortgage without court intervention, but the actual process of foreclosure and repossession requires another step, known as a claim for possession.
In this stage, the courts hear the case, and the lender will need to establish that the homeowner did not make an effort to save their home. If the homeowner is able to make an acceptable proposal to the judge, then the home will not be taken. Instead, the judge will issue what is known as a suspended possession order. This will allow the homeowner to make alternate payment arrangements and stay in their home. As long as these arrangements are kept, the home will not be taken.
However, if the homeowner again defaults, the lender can then appeal to the courts again. In this case, or if the homeowner isn’t able to make acceptable arrangements, the judge will set a date when the home must be vacated. Should the homeowner not vacate the home by this date, the lender must once more appeal to the courts. This time, the judge will issue what is known as a warrant of possession. Armed with this, the lender can then take the home, though there are still other options the homeowner can apply for in an appeal.
Eventually though, if the homeowner just can’t keep their mortgage, court bailiffs will come and assist the lender in taking possession of the home. They are generally firm, but non-forceful when doing this. That said, they are authorised to use a reasonable amount of force to enter a home and evict the homeowners, as per the power granted them by the judge’s decision to issue a warrant of possession.
What if you just walk away?
Just picking up and walking away is never a good idea. However, if a mortgage is far enough under water that it’s something you don’t want to keep throwing good money at, you may have that option. It’s not nearly as bad as an outright default, as the lender is given the choice between taking either the home or the loan value. If they choose to take the loan, you get to keep the home, but still owe the loan value. This is known as a non-recourse mortgage, but most of the time lenders will take the home.
If you do have a non-recourse loan, then the most important thing to do is not miss any payments. Then, if you decide to walk away, you can talk to a good mortgage lawyer, and walk away without any record of missed payments. Your credit will take a hit, but after a few years things will have picked back up. It’s much better than the earlier example of a delinquent default. It’s also a last resort, but one that savvy investors keep on their short list. That way, if a rental property investment is just drowning and won’t be worth anything for years, an investor can cut their losses. The same applies to homeowners though, as they too can walk away, if they have the right mortgage.
What does all of this do to your credit?
Honestly, it isn’t pretty. If you’re financially smart enough to have a non-recourse mortgage, then you can do damage control and be looking sharp again in about three years. Not so for those who have a delinquent default. In this case it can be years before your credit is likely to hold water again. How many years depends on the final date your foreclosure is settled, but you should expect five to seven years of bad credit from it.
Sometimes though, you can control how the repossession is reported to the credit agencies. If you’ve got room to negotiate, and the lender wants something from you, consider asking them to report the deed either paid as agreed, settled, or unrated. Get this in writing, and make sure your lawyer signs off on it too. Otherwise the lender can report it as a foreclosure, which will haunt you for years.