Understanding Mortgage Default
When a borrower or mortgagor who the lender lent mortgage or finances fails to fulfill the requirements to pay back the obtained debt in the form of periodic payments is termed as mortgage default. As stated in the agreement signed during the assignment of the mortgage by the lender to the borrower, the borrower enters a contract with the lending entity and promises to make a continuing payment back to the lender that will contribute towards the principal amount lent and the interest accrued during the mortgage period. This amount of interest to be paid can depend on term, interest rate, type of mortgage, or amortization. The documentation signed during the closing phase of the mortgage is legally binding, and both lender and borrower are obliged to fulfill its obligation. Hence, any diversion from the same makes it illegal.
Whether the mortgage or loan was as secured debt, i.e., backed by the collateral, or unsecured debt, i.e., not backed by any collateral, anytime the borrower fails to make the payment in time, it is considered a default. Whenever the borrowing individual or entity fails to fulfill debt obligation, the lender has the legal right to resort to some action to reclaim their invested funds from the borrowing individual or entity.
When the borrower secured the mortgage to purchase, renovate or rebuild or build new real estate property or home, they assign their home or real estate asset to the lender as collateral. As the collateral backs up real estate property or home mortgage, the lender can legally reclaim this asset.
In the case of the home mortgage, if the homeowner and mortgage applicant fail to make payments, their mortgage will fall into a defaulted mortgage category. The borrower’s mortgage default gives the lender the right to take possession of the property or the home and sell it to retrieve the invested capital using the power of sale process or the foreclosure process.
Power Of Sale Method
In the power of sale method, the mortgage lender can evict occupants with a legal notice and sell the home or real estate asset for the fair market value. The lender’s fiduciary duty is selling at fair market value and cannot intentionally sell it for a lesser value. The lender must wait out for 15 days after missed payment to initiate this process. But suppose the property sold by the lender earns a profit as it sells above the mortgaged amount. In that case, the homeowner who defaulted on the mortgage has a legal entitlement to these profits after deducting fees and mortgaged amount. But if the selling amount falls short to cover the mortgaged amount, the lender can sue the owner to cover the remaining difference. The overall process of the power of sale is less taxing than the foreclosure process as it requires less judiciary involvement. Moreover, the lender has the right to sell but not acquire.
Foreclosure
In the foreclosure method, the lender can sue the borrower for defaulting and acquire the legal title to the property after they file suit against the mortgagor and follow the court’s judgment. The lender may let several months pass before even launching any juridical proceedings. After lengthy legal work processed by lawyers and financial inspectors, the lender becomes the owner is entitled to any earned profit after the home or property sale, and the homeowner gets no part from this selling price. Moreover, the lender does not have any obligation to sell it at fair market value. As this process is lengthy and requires more legal work, it takes longer than the power of sale method.
Other direct consequences of defaulting on any mortgage or loan include:
- massive blow to credit scores it gets lowered for the late or missed payments
- a lower credit score, in turn, impact the overall credibility of the borrower as this moves them from the good to the bad credit history space
- other mortgage default penalties or wage garnishment to fulfill pre-agreed conditions
- high-interest mortgage rates or insurances for future loan applications
- finally, emotional stress and embarrassment on an individual
Avoiding Mortgage Default
Finding the best solution for avoiding the mortgage default boils down to the home’s value or the real estate asset whose mortgage is being defaulted. Additionally, it depends on the remaining mortgage amount owed, the stage of the legal proceeding where the lender is currently, and the borrower’s other debts and financial shortfalls.
Speak To Legal or Financial Advisor
The first and foremost step to avoid and mistake is to consult the financial and mortgage matter expert or a legal advisor to help you find a solution to your problem. They can help you steer in the right direction to pick the best course of action that enables you to eliminate mortgage default. Moreover, guide you to maintain your good credit repo in the future by evaluating your current finances and other debt liabilities.
Sell before the lender takes matters into their own hands. If the borrower believes the property’s value is higher than the mortgaged amount, they can sell it themselves before the lender can take it and put it on sale and use the amount recovered to pay back the mortgage and keep the profits.
Refinance with the second mortgage
When possible, you can apply for a new mortgage if the home or the property has equity. New Mortgage can use this to fulfill the obligation of the existing mortgage and pay it back, including the fees to bring it back to good standing.
Restructure your current home debt
You can reach out to your lender, inform them about your situation, figure out a new workaround, and negotiate a new mortgage to help with your payments. For example, increasing the amortization period from shorter to longer can help reduce the monthly amount owed. If that doesn’t work out, you can reach out to a different lender or even a private lender and find a new mortgage that suits your need and use that to exit the current one.
In the end, when nothing works out, the best option is to walk away from all the hassle. But remember, it is never too late to share your problem with someone and seek expert advice to overcome this issue.
