It has been a rough few years for many households. Between the loss of income due to the COVID-19 pandemic, the difficulties of running a business amid uncertainty, rising living costs, and issues finding reliable childcare while balancing remote and in-person work, many families have found themselves behind on their mortgage payments.
To prevent massive waves of foreclosures nationwide, the federal government, most states, some localities, and many mortgage lenders put foreclosure moratoriums into effect, allowing homeowners to delay their monthly payments. However, in 2022, most of these moratoriums have expired, and many homeowners find themselves with a delinquent mortgage.
A delinquent mortgage occurs when the homeowner falls behind on one or more mortgage payments. If the property owners are unable to service their loan, the mortgage lender is entitled to start the foreclosure procedure to recoup their losses.
4.11% of mortgages were delinquent as of Q1, 2022
As of the first quarter of 2022, approximately 4.11% of mortgages were delinquent after decreasing for 14 consecutive months from their pandemic peak of 8.22% in the second quarter of 2020. This number includes all delinquent mortgages, including those with only one missed or late payment. Serious delinquency rates, including loans delinquent for 90 days or more, which is typically when most mortgage lenders may start a foreclosure procedure, represent 1.3% of mortgages. However, keep in mind that a delinquent mortgage does not necessarily lead to foreclosure, as most homeowners can eventually catch up on their payments.
Foreclosure rates remain approximately 50% to 75% lower than mortgage delinquency rates. The foreclosure rates have been holding steady in the current real estate market, which suffers from a significant lack of inventory. They remain very low since most distressed homeowners can unload the property before the foreclosure process starts.
Nevertheless, falling behind on payments is a very stressful time for borrowers who find themselves at risk of losing the roof over their heads. If you find yourself in this challenging situation, you are in the right place. This guide will help you better under mortgage delinquency, its short and long-term implications, and how you can avoid it in the future.
What Happens When You Pay Your Mortgage Late?
So, your mortgage due date has come and gone, and you have not made a payment in time? Your mortgage may be delinquent, but all is not lost. Most mortgage contracts include a grace period, typically 10 to 15 days. You can still make a payment without a late fee during the grace period, and your late payment will not affect your credit score. Your mortgage is not considered delinquent until at least 30 days past the due date.
What are the Short-Term Consequences of Mortgage Delinquency?
Once your mortgage is delinquent – 30 days past the due date – the lending institution is required to report your account to the credit bureaus. The longer your account remains outstanding, the harsher its negative impact will be on your credit score. In addition, a late payment can stay on your credit report and impact your score for up to seven years.
A credit score blemish is not the only consequence of mortgage delinquency. You will also need to pay late fees, the amount of which can depend on the lender, as well as the terms of the mortgage, for every payment made after the grace period. Based on your mortgage agreement, some lenders may not charge late fees until 30 days have passed from the due date, but your mortgage will still be considered delinquent.
What are the Long-Term Consequences of Mortgage Delinquency?
If you stop paying your mortgage, your lending institution can start a foreclosure process to take possession of the property. However, it is a long and expensive legal process, and most lenders prefer to avoid taking such drastic measures whenever possible. Most lenders will not start a foreclosure until your balance remains unpaid for 3 to 6 months. Therefore, you have a bit of leeway if you find yourself in a difficult situation.
The first step to a foreclosure process is for the mortgage lender to file a notice of default. A default notice is a public notice filed with a court stating that a mortgage borrower has been delinquent on a loan for an extended period of time. However, you will have many opportunities to stop the process if you can meet your mortgage obligations along with any legal fees or property inspection fees made necessary by the foreclosure process.
What Can I Do If My Mortgage is Delinquent?
Bad things happen to good people. Banks prefer to avoid initiating a burdensome eviction process whenever possible, so your best bet is to maintain open lines of communication with them to reach an agreement. If you think you will not be able to meet your mortgage obligations, your first step should be to call your mortgage lender proactively to discuss your options. Keep in mind that your mortgage servicer is the company you make your payment to and may or may not be your original lender. Here are some possible scenarios to avoid a delinquent mortgage, depending on your circumstances.
Forbearance
If you think your financial hardship may be temporary, you may qualify for mortgage forbearance. Mortgage forbearance allows you to temporarily stop your mortgage payments. However, the payments that would have been originally due during the pause have to be paid back, and the forbearance will typically negatively impact your credit. Nevertheless, it is a preferable scenario to losing your home.
If you qualify, you may also request to delay a certain number of payments until you refinance, sell your home or otherwise pay off your mortgage, which may be called a deferral or partial claim, depending on the type of loan.
Repayment Plan
If you went through a difficult past but have regained your financial stability (if you lost your job but found a new one, for example), you can also negotiate a repayment plan with your lender that allows you to tack the outstanding balance to your regular mortgage payments until your past-due balance is paid off. However, lenders a more likely to agree to short repayment plans (typically one to three months), so your payments will be significantly higher.
Loan Modification
If your financial circumstances have changed significantly or if you are consistently behind with your mortgage payments, your lender may offer to modify the original terms of the loan, such as changing your interest rate, the loan term, or the principal amount owed, so your monthly payments are more affordable. For example, if you have an adjustable-rate mortgage and the interest rates are increasing rapidly, you may qualify for a fixed-rate mortgage to avoid further consequences. Although a loan modification will negatively affect your credit score, the impact will be less than foreclosure.
Reinstatement
If you can afford to do so, the best-case scenario is to reinstate your mortgage by paying off the total amount past due. If it is not an option, consider keeping your mortgage on its current loan term and interest rate to minimize the impact on your credit score.
Short Sale
Unfortunately, sometimes, keeping your house is no longer an option. If necessary, you may need to negotiate a short sale with your mortgage lender. In this scenario, the lender agrees to let the borrower sell their home for less than the amount they owe on the mortgage. The proceeds go to the lending institution that may either forgive any remaining balance owed or obtains a deficiency judgment, in which case the borrower is legally obliged to pay any remaining amount. The lender can approve or deny all the offers and manages the sale.
A short sale is not an easy decision and will have a lasting impact on the seller’s credit. However, it is not as severe as it would be with foreclosure. In some cases, the borrowers may even qualify for a new loan right away if they have an otherwise excellent mortgage payment history and depending on the new type of loan they are applying for.
Deed-In-Lieu of Foreclosure
Another option to let go of the property while avoiding further trauma is to sign the property over to the lender as long as the house is in good condition and the lender agrees. Some mortgage lenders may also offer cash for the keys to help you get started on the right foot. Despite the blemish borrowers will receive on their credit score, they can qualify for a new loan four years after a deed-in-lieu rather than the seven years necessary after a full foreclosure.
Foreclosure
Foreclosure is a long, expensive, and legally and emotionally charged process for both the lender and the borrower. Therefore, it is often a worst-case scenario for all parties involved. Foreclosures will also have a significant impact on your credit score and credit history. A poor credit score may prevent you from finding new accommodations. You will also need to wait up to seven years to qualify for a new loan. If you find yourself at risk of mortgage delinquency, it is best to start negotiating with your lender as soon as possible to avoid this situation.
Conclusion
Mortgage delinquency could have a significant impact on your credit and future financial health. Therefore, you must submit your mortgage payments in a timely fashion. A delinquent mortgage can lead to foreclosure. But remember that it is often the last resort for lenders, and there are ways to avoid foreclosure. If you find yourself in delinquency and don’t have the funds to make payments, contact your mortgage lender right way to discuss potential options, such as forbearance and a repayment plan.
