While governments have forever been trying to beat the economic boom and bust cycle, this has so far proved elusive. Consequently, during difficult economic times, unemployment will increase, and many people may struggle to maintain their mortgage loan repayments. If you are struggling with your mortgage repayments, it is advisable to speak with your lender as soon as possible. However, unfortunately, we see many people simply stop paying their mortgage loans and often paying a heavy price.
Basic mortgage agreement
When we remove all of the add-ons and extras, a mortgage agreement commits you to repay a certain amount of money each month for a set number of years. As soon as you default on any monthly payment, this hands over additional powers to your mortgage provider. So, if you are struggling one month and considering missing a mortgage payment, we strongly advise you think again!
We will now examine what happens when you simply stop repaying your mortgage loan and what you can do to mitigate challenging financial situations.
Do all mortgage defaults lead to foreclosures
The simple answer is no. The technical answer is that as soon as you default on a payment, this gives your mortgage provider the right to take legal action to recover outstanding mortgage debt. As we saw back in 2008, when the US sub-prime mortgage market collapsed, large numbers of foreclosures can have a considerable impact on the housing/mortgage markets.
So, while foreclosure action is available as soon as you default on your mortgage, this is not your mortgage company’s preferred action.
Suspended foreclosure proceedings
Before we look at the specific process relating to mortgage defaults, it is worth noting that many mortgage providers have suspended foreclosure proceedings during the COVID pandemic. Many experts believe this is simply storing up substantial financial problems for lenders and borrowers in the future. It seems inevitable we will see many foreclosures in short to medium term, and numerous homeowners may struggle to regain their previous financial health.
The foreclosure process, the calm before the storm
There are many misconceptions about personal finance and, in this particular situation, mortgage finance. Your lender will not come knocking on your door at the first sign of financial distress after missing your first mortgage payment. Many people forget that the foreclosure process is seen as the “nuclear option” and can be lengthy and costly to action.
Mortgage lenders will have a slightly different procedure when tackling overdue mortgage payments, but there tends to be a common theme. The path towards an eventual foreclosure looks like this.
Period of grace
The first thing to remember is that your missed mortgage payment will not be classed as “late” until 15 days after it was due. You will find that many lenders refer to this as the “grace period” — a time during which customers are given a chance to resume payments. Therefore, it is unlikely that you would receive any correspondence from your mortgage provider during this period. However, once you exceed the 15 day grace period, we move onto the next part of the process.
If you failed to resume your mortgage payments or contact your mortgage provider, the formal correspondence process begins. Initially, your lender will send a letter in the mail detailing your missed payment with a revised payment date. Unfortunately, this is the point at which additional fees will start to rack up, with many lenders charging a late fee.
Whether or not you can resume mortgage payments, it is advisable to contact your lender. As we will cover later in this article, there are several options open to those struggling.
The three-month window of opportunity
While the commencement of formal correspondence will open the door to foreclosure proceedings, this will not happen immediately. Typically, a mortgage provider will only begin foreclosure proceedings after three months of missed payments. Customers must consider their options during this three-month window of opportunity. This is the time to work with your mortgage provider, not against them. The situation is still retrievable at this point.
Notice of default
After three months of missed payments, your mortgage provider is likely to issue a “notice of default” at your local county recorder’s office. This is a notice of intention to foreclose on your property. Foreclosure means taking back control, selling the property to repay the outstanding mortgage debt. This pre-foreclosure period can last between 30 days and 120 days, depending on the terms of your mortgage and the provider.
An additional window of opportunity
It is important to note that your home cannot be sold (without your permission) before the end of the “notice of default” period. However, as this could be up to circa four months, this gives you more opportunity to restructure your finances, consider your options and discuss them with your mortgage provider. Typically this would involve a new repayment plan or what is referred to as a “short sale.”
What is a short sale?
Sometimes referred to as a pre-foreclosure sale, a short sale is an agreement between the homeowner and mortgage provider to sell the property for less than the outstanding mortgage. These arrangements are standard where the homeowner is unlikely to see a recovery in their finances in the foreseeable future. Thus, even though the mortgage provider would write off the shortfall, this would still impact the homeowner’s ability to raise finance in the future.
As the foreclosure process can take some time to complete, many people believe that a relatively quick sale, where the property continues to be occupied, is a serious option. Unfortunately, numerous properties in the foreclosure pipeline can stand empty for some time. This can often lead to structural issues and damage, reducing the value of the property when it is eventually sold. On reflection, a short sale is quite often the best option for both parties.
It is important to note that you cannot be evicted until the end of the pre-foreclosure period. However, many people prefer to make alternative arrangements and remove the stress of not knowing where they will be living tomorrow.
Upon expiry of the pre-foreclosure period, assuming no alternative arrangements have been agreed, the lender will complete the foreclosure. You will be evicted from your home and the property sold to recoup as much of the outstanding debt as possible. There are numerous ways in which foreclosure properties can be sold, including specialist websites and auctions. The US foreclosure property market is enormous and has spawned several popular TV programs. Many properties are sold below their market value to recoup as much money as possible, as soon as possible.
How to avoid foreclosure of your home
When faced with financial difficulties, mental and physical pressures can take their toll. For many, it is the uncertainty about where their future lies, how they can resurrect their finances and return to a “normal life.” As we mentioned above, the typical foreclosure process involves several breaks in which customers and lenders can discuss the options available. If you’re in such a situation, it is essential to use these grace periods to find the best solution to your crisis.
Many people will take professional financial advice at this stage; look at all of the options available to protect their home. There are typically four main options which include:
Refinancing your mortgage
When you begin to experience financial difficulties, you should contact your mortgage provider to discuss your options. Many lenders will be open to the idea of refinancing your existing mortgage debt. However, this will involve revised interest rates and terms and conditions which will reflect your current financial status.
Those experiencing financial difficulties may benefit from extending the duration of their loan, which may, in turn, reduce their monthly payments. However, there would need to be evidence that any refinancing was affordable in the longer term. If your financial situation were unlikely to improve in the immediate future, then refinancing your mortgage would not be an option.
Structuring a repayment plan
The majority of mortgage companies will be open to discussing a repayment plan structured around your short, medium, and long-term financial outlook. The idea is simple; you would make good on missed payments and charges and eventually look to return to regular monthly payments. For many people, a repayment plan will give them that short-term breathing space to work on their finances, revised living expenses, and prospects for the future.
Often referred to as forbearance, a repayment holiday is a temporary suspension of mortgage payments. This arrangement would cover a specific period, relatively short-term, after which you would be expected to revert to previous monthly payments and catch up on deferred payments.
If you face short-term financial issues, forbearance can be a way out of this predicament and back to a more balanced financial scenario. However, there must be light at the end of the tunnel for your mortgage provider to agree to such an arrangement. Otherwise, unaffordable debts will continue to mount up, and the foreclosure period is simply extended.
Revised loan agreement
Where it is evident that any financial challenges will be short-lived, mortgage lenders are more likely to look at a revised loan agreement. This may involve an extension of the loan period, thereby reducing monthly payments to more manageable levels. However, if your financial situation has deteriorated, any revised agreement may include a higher interest charge.
As you can see above, there are numerous opportunities to discuss alternatives to foreclosure and the loss of your home. The vast majority of homeowners will likely go down the refinancing, repayment plan, payment holidays, or loan modification routes. Unfortunately, where there is little likelihood of an improvement in your financial situation, a short sale or foreclosure may be the only viable option.
If you are experiencing financial difficulties, it is crucial to speak with your mortgage lender and let them know about your changing situation. The earlier you talk to your lender, the more options available and the greater the opportunity to avoid foreclosure.