What to expect when you default on your mortgage

A mortgage default is a credit condition that indicates the homeowner has failed to make the required payments specified in the mortgage agreement. Not paying your monthly mortgage payments can have a variety of consequences, from a negative impact on your credit history to potentially losing your home in foreclosure.

Homeowners experience various hardships that can lead to home loan defaults. Understanding what mortgage default means and how to avoid it—as well as your options if you're in the thick of it—can help you get through this tough situation.

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As with other types of debt, a mortgage goes into default when the borrower fails to meet the repayment terms in the promissory note. Reasons why a lender may consider a home loan in default include:

Missed monthly payments
Unpaid property taxes
Unpaid home insurance
Unapproved transfer of title to real estate
Unauthorized use or acquisition of property
Damage or deterioration of property due to negligence that reduces the value of the home

Let's say you're having trouble keeping up with your mortgage payments. If you are 30 days late with your monthly payments, your account will become delinquent, which can result in a late fee and a hit to your credit score. Depending on the mortgage lender, you can be 30 to 90 days delinquent on your loan before it goes into default. (Some lenders allow even more time.) Once you're in default, more serious steps will be taken, such as attempting to collect and starting the foreclosure process.

The consequences of defaulting on a mortgage loan can vary depending on your situation, state laws and the terms of the loan agreement. Below are a handful of events that can occur during a home loan default.

Missed payments and late fees

Perhaps your mortgage lender or servicer has contacted you about missed monthly payments. This can include phone calls, late notices after your first missed payment, and late payment penalty fees attached that exceed the lender's grace period.

Due to the unpaid interest and penalties that accrue, as your mortgage goes into default, your debt grows.

Additional information: What to do if you have a fraudulent mortgage

One of the long-term effects of defaulting on a mortgage is that it will appear on your credit record for seven years. This mark lowers your credit score and is visible to all lenders who do a credit check on your borrowing habits, such as when you apply for a new credit card or personal loan.

Delinquency signals that you could be a risky borrower with a history of not honoring your promise to repay the debt based on the criteria set out in your loan agreement. To mitigate this risk, lenders may charge you higher interest rates for this privilege or choose to deny your application altogether.

Depending on your state's laws, lenders may be required to allow you to remedy a home loan default. This is called mediation before foreclosure. Some states that follow this requirement include (but are not limited to) California, Florida, Illinois, Kentucky, and Wisconsin.

During this period, you can work in good faith with an independent broker to resolve the default and restore your mortgage before the property officially goes into foreclosure. As a borrower, this process is entirely voluntary and to be successful, you and the lender must reach a mutually agreed settlement offer. However, remember that the lender is not obligated to accept your application.

If you and the lender cannot reach an agreement during the mediation phase, the property will go into foreclosure. Depending on the terms of the loan agreement and state laws, the lender will file for foreclosure through a court proceeding against the homeowner or conduct an out-of-court foreclosure that does not require a court proceeding.

Creditors or trustees who are awarded a judgment in their favor during foreclosure – or have met the requirements for an out-of-court foreclosure – can then advertise the property for sale.

During a mortgage default, the lender may choose to exercise an acceleration clause in your home loan agreement. This provision gives the creditor the right to demand full repayment of the outstanding interest on the loan principal. If the foreclosure process has begun but not yet closed, you may choose to pay the entire accelerated debt to stop the foreclosure and cure the mortgage default.

Some reasons for debt acceleration include events such as the debtor declaring bankruptcy, failing to pay property taxes, or consistently missing monthly mortgage payments.

You may experience a mortgage default due to a number of events beyond your control. For example, a sudden and severe loss of income or unexpected medical bills can drain your resources, leaving you unable to afford your mortgage payments.

Depending on your situation, you may be able to strengthen your financial stability before these difficult scenarios occur or get support earlier in the process to avoid mortgage default. Here are some tips to avoid defaulting on your mortgage:

Build up emergency savings. One way to weather unplanned financial turbulence is to have a comfortable financial safety net in place. Based on your budget, set aside a manageable and reasonable amount of emergency savings. If there is a financial crisis, you will have some money to put toward your mortgage payments until you get back on your feet.
Contact your lender as soon as possible. If you have the slightest inkling that you may not be able to make your monthly payment, contact your mortgage lender or servicer immediately. For example, if you need a few extra days to get your funds or are facing short-term difficulties, the company may extend your grace period or temporarily foreclose on your loan to avoid default.
Refinance your mortgage loan. If you haven't made a payment yet, but would like more manageable repayment terms, consider refinancing. With a mortgage refinance, you take out a new loan to pay off the original one. This new mortgage has a different maturity and interest rate. Depending on the refinance and your qualifications, this may help you secure a lower mortgage rate or a lower payment.

Additional information: The best mortgage refinance providers

Even if you're in the middle of defaulting on your mortgage, you may still be able to soften the blow in the short term. However, remember that all of the paths below can negatively impact your credit.

If you've defaulted or are at risk of defaulting on your mortgage, a loan modification could be a solution – if your lender is receptive. While a refinance replaces your original mortgage with a new one, a modification changes your existing home loan. Short-term or long-term changes to the repayment details in your loan agreement. Modifications may include temporarily reducing the mortgage rate or extending the term of the loan.

There are limitations to this approach, including potentially paying more for your home over time if your lender gives you a longer loan term.

A short sale could be the answer for cash-strapped homeowners if you currently owe more than your home is worth. In a short sale, the homeowner voluntarily agrees to sell the home and direct the proceeds of the sale to the lender. In exchange, the lender agrees to cancel the lien on the property.

If the lender does not agree to forgive the deficiency, the homeowner is still responsible for any unpaid mortgage debt. Additionally, if the lender forgives any amount, it may be treated as taxable income on your tax return.

Additional information: How a short sale works in real estate

Another option if your mortgage is delinquent (or could be soon) is to file for bankruptcy. Bankruptcy requires a court proceeding, during which time the lender's efforts to foreclose on the property are suspended.

Chapter 7 bankruptcy is only available if you have current monthly payments, so it is for homeowners who are at risk of defaulting but have not yet reached that point. Under Chapter 7 bankruptcy, your assets are liquidated and your mortgage is discharged, but you can still lose your home to foreclosure if you continue to miss payments. Alternatively, Chapter 13 bankruptcy allows you to cure your mortgage defaults over time through a court-approved payment plan over three to five years.

Dig deeper: Can You File Bankruptcy And Keep Your Home?

When your mortgage loan defaults, your lender can take certain steps, such as accelerating the debt so that it is paid off in advance rather than through payments over the life of your loan. It can also initiate a foreclosure on the home, and if you don't resolve the default, you could lose your home.

After missing one mortgage payment, the account status is likely to be considered “delinquent” on your credit report. After three months of default on your mortgage loan, your lender can start foreclosure. If not resolved, continued non-payment could result in the lender foreclosing and selling your home to recoup the loss.

If you can't make your mortgage payments, contact your lender or lender right away to learn about your options. For example, you may be able to access short-term relief or a loan modification to help you manage your repayments financially. An example of a modification is an extension of the repayment period of a housing loan or a temporary reduction in the mortgage rate.

Edited this article Laura Grace Tarpley.