Mortgage: What Happens and What to Do if You Can’t Pay

Homeowners who have qualified for a mortgage are obligated to pay off the lender according to the terms of the mortgage agreement. Otherwise, you are getting into arrears if you can't pay mortgage on time. Arrears or arrearage is the legal term that refers to a financial obligation that has not received payment by its due date. Building mortgage arrears can put you in a financial bind, which may eventually cause you to lose your home. If you are struggling to pay your mortgage, this article should provide you information about where to start.

What Happens When You Stop Paying Mortgage

In today's economy, it comes as no surprise that many homeowners struggle to keep up with their mortgages. So, what happens if you don't pay your mortgage?

1. You will be given an overdue fine

Missing a payment may not cause you any consequence just yet. If you can't pay a mortgage, the servicer will contact you via a phone call or an email to talk about bringing your account current. You will be given a grace period of 16 – 30 days, depending on the lender to settle your account. Otherwise, the lender will assess late charges. The amount is set out in the promissory note you signed when you applied for a mortgage. Typically, the fees range from 3% to 5%.

2. A credit-reporting agency will list your delinquencies

One of the biggest mistakes you make when you skip a mortgage payment is hurting your chances of applying for a new loan in the future. The lender will report your delinquency to major credit bureaus 30 days after your first missed payment. The more payments you miss, the greater it affects your credit score.

3. You will receive a Notice of Default

The owner of the loan will take reasonable steps to contact you after each payment due date for as long as you are delinquent on the loan. If you still can't pay the mortgage after 90 days, the lender may file a Notice of Default in a court. The Notice of Default is the first step towards the foreclosure process but the lender may have to wait until you are 120 days delinquent before they can initiate other legal proceedings. In some cases, filing for a Notice of Default includes a negotiation grace period.

4. The lender will initiate a foreclosure

A foreclosure could take two to three months after the Notice of Default has been issued. The lender would have to file a lawsuit to prove that they have taken all the necessary steps to remedy the situation and repossess the collateral for the loan that is in default.

5. Redemption period

A redemption period will be given to you after the foreclosure has been completed. During this time, you can remain in the property without the risk of eviction. The duration of the redemption period depends usually on state law. Nevertheless, this is the last chance to pay off your debt or buy back your home.

What to Do if You Can't Pay Mortgage

It is difficult to know where to start when you are overwhelmed with mortgage debt. The following should help you minimize the financial damage of giving up your home.

1. Contact your mortgage servicer or lender

One of the reasons why many homeowners lose their homes is due to denial. Rather than bury your head in the sand, notify your mortgage lender about your situation before you miss a payment. When you talk to your mortgage servicer, be prepared to explain: - What predicament prevents you from making a payment - Whether your financial crisis is temporary or not It is advisable that you should also be transparent about your income and expenses. Once the mortgage lender understands your predicament and good intentions, you may be able to enter into what is known as mortgage forbearance. Your lender may allow you to take a break from your mortgage payments, so you could resolve your immediate financial crisis before your home forecloses. However, mortgage forbearance is not a feasible option if your financial hardship seems permanent.

2. Sell or rent your home

If you are facing a serious financial crisis, then it is best to sell your home if it is worth more than you owe. This makes the most sense as it prevents you from affecting your credit score in the future. Renting your home is also a good alternative if it can be rented for more than your monthly mortgage dues. However, take note that you would still pay for taxes, insurance, and house repairs.

3. Apply for a loan modification

A loan modification is an option given to those who are stretched to the max. As the name suggests, the lender gives either a temporary or a permanent change to your mortgage rate or term.

4. File for bankruptcy

Filing for bankruptcy may seem a desperate move but if you are indeed overwhelmed by a burden of debt, the possibility of being released of lawsuit charges, stress, and psychological turmoil is an advantage too hard to resist. However, bankruptcy will destroy your credit score and make it barely possible for you to apply for a new loan from anyone for many years.