{"id":163635,"date":"2023-12-22T13:48:20","date_gmt":"2023-12-22T20:48:20","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=163635"},"modified":"2024-01-15T05:05:10","modified_gmt":"2024-01-15T12:05:10","slug":"what-is-a-mortgage-default","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/what-is-a-mortgage-default","title":{"rendered":"What is a Mortgage Default?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC1981582644\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p>Borrowing a mortgage is a big responsibility. When you\u2019re an investor, lenders take serious precautions to ensure you can afford it, but many borrowers still default.<\/p>\n\n\n\n<p>A mortgage default can greatly hurt your credit and future chances of purchasing real estate, even for your own use.<\/p>\n\n\n\n<p>So what is a mortgage default, and how does it work?&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Is a Mortgage Default?<\/h2>\n\n\n\n<p>If you don\u2019t meet the loan terms you agreed to when you closed on your mortgage, you are in mortgage default. The most common way is to miss your monthly principal and interest payments.&nbsp;<\/p>\n\n\n\n<p>Your loan agreement states you agree to make your payments by a specific date each month. If you fail to do this, you are in mortgage default.<\/p>\n\n\n\n<p>Another less common way to be in mortgage default is not to stay up to date on your property taxes or homeowner\u2019s insurance. Your loan agreement states that you agree to pay your taxes and keep your home insured. If you don\u2019t, you default on the mortgage agreement.<\/p>\n\n\n\n<p>A couple of other ways to default include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Not properly maintaining the home and letting its value decrease<\/li>\n\n\n\n<li>Transferring the property <a href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-a-deed\" target=\"_blank\" rel=\"noreferrer noopener\">deed<\/a> without lender permission<\/li>\n<\/ul>\n\n\n\n\n\n\n  <div class=\"lg:block\" x-data=\"{ ad_block_block_6585f50150c13: popAds(1) }\">\n      <template x-for=\"ad in ad_block_block_6585f50150c13\">\n        <a\n          :href=\"ad.linkURL\"\n          class=\"no-underline text-black\"\n          x-on:click=\"adClicked('https:\/\/www.biggerpockets.com\/blog\/what-is-a-mortgage-default', ad.sponsor, ad.title, ad.id, 'blockAdClicked', 'blockAd', '')\"\n          target=\"_blank\">\n          <div\n            class=\"py-4 border-b flex flex-col flex-nowrap text-sm border-t px-0 rounded-none\"\n            x-init=\"\n              analytics.track('blockAdLoaded', {\n                referrer: 'https:\/\/www.biggerpockets.com\/blog\/what-is-a-mortgage-default',\n                sponsor: ad.sponsor,\n                ad_title: ad.title,\n                ad_page_location: ''\n              })\n            \"\n            x-intersect:enter.once=\"adViewed('https:\/\/www.biggerpockets.com\/blog\/what-is-a-mortgage-default', ad.sponsor, ad.title, ad.id, 'blockAdViewed', 'blockAd', '')\">\n            <div><span class=\"text-xs text-slate-light block bg-slate-50 p-1 inline-block rounded-md\">Sponsored<\/span><\/div>\n            <div class=\"flex items-center text-sm space-x-4\">\n                <img :src=\"ad.imageURL\" :alt=\"ad.imageAlt\" class=\"h-10 w-10 object-cover rounded-full\">\n\n                <div clas=\"text-sm\">\n                    <span class=\"font-bold block\" x-text=\"ad.sponsor\"><\/span>\n                    <span class=\"text-slate\/80\" x-text=\"ad.description\"><\/span>\n                <\/div>\n            <\/div>\n\n            <div>\n                <span class=\"font-bold\" x-text=\"ad.title\"><\/span>\n                <p class=\"mt-2 text-slate\/80\" x-text=\"ad.body\"><\/p>\n                <span class=\"mt-2 text-themeBlue block mt-2 underline\" x-text=\"ad.linkTitle\"><\/span>\n            <\/div>\n          <\/div>\n        <\/a>\n      <\/template>\n  <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">The Process of a Mortgage Default<\/h2>\n\n\n\n<p>Once you default on your loan terms, the lender can take action. They usually don&#8217;t do anything until you&#8217;ve missed several monthly payments. If you do, they can request that you \u201ccure the default.\u201d There are a few ways they can require this, including making up your missing payments or accelerating the debt, which means you must pay the entire outstanding balance to restore the loan.<\/p>\n\n\n\n<p>If you don&#8217;t restore the loan, the lender can start the <a href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-a-foreclosure\" target=\"_blank\" rel=\"noreferrer noopener\">foreclosure process<\/a>. Your rights before this happens are laid out in your mortgage agreement. Be sure to read the fine print to see your options to cure the default.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Consequences of a Mortgage Default (Risks)<\/h2>\n\n\n\n<p>If you and your lender cannot come to an agreement after going into default, the lender has the right to foreclose on the property. This means the lender takes possession of your home and tries to recoup the funds they lent you.<\/p>\n\n\n\n<p>A foreclosure stays on <a href=\"https:\/\/www.experian.com\/blogs\/ask-experian\/how-long-does-a-foreclosure-stay-on-your-credit-report\/\" target=\"_blank\" rel=\"noreferrer noopener\">your credit report for seven years<\/a>. So not only do you lose the property, but the action damages your credit for many years.&nbsp; Your <a href=\"https:\/\/www.biggerpockets.com\/blog\/credit-score-buy-house\" target=\"_blank\" rel=\"noreferrer noopener\">credit score<\/a> will likely decrease as much as 150 points, and you may be liable for the difference in the amount the lender gets from the sale and what you owe. They could even sue you for it.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How Does the Foreclosure Process Work?<\/h2>\n\n\n\n<p>The foreclosure process varies by state, as each state has different laws, but here\u2019s the general process.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Default<\/h3>\n\n\n\n<p>A lender cannot start the foreclosure process unless you&#8217;ve defaulted on your loan. They can send borrowers a nonpayment notice after the first missed payment. This is to warn you of your default and the need to catch up.<\/p>\n\n\n\n<p>If you miss an additional payment, they will send a demand letter demanding repayment before they take further action.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Notice of default<\/h3>\n\n\n\n<p>If you miss three payments (90 days late), the lender will issue a Notice of Default. This is still a warning and often includes a grace period to restore the loan. During this time, discussing your situation and options with the lender is crucial.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Notice of trustee\u2019s sale<\/h3>\n\n\n\n<p>In most states, lenders will hold a trustee&#8217;s sale or housing auction. The lender starts the auction with an opening bid that they calculate based on the outstanding loan amount and any unpaid <a href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-a-lien\" target=\"_blank\">liens<\/a>, such as tax liens.<\/p>\n\n\n\n<p>If there is a winning bidder at the auction, the bidder takes immediate possession of the property and deed.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">REO sale<\/h3>\n\n\n\n<p>If the property doesn\u2019t sell at auction, the lender may give it to a real estate agent in their network to sell. The lender may take care of the liens on the property to make the property sell faster.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Eviction<\/h3>\n\n\n\n<p>During this entire process, the occupants can remain in the home. When the home sells at the auction or as an REO sale, the occupants must leave, as the property will change ownership.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Impact of a Mortgage Default on a Real Estate Investor<\/h2>\n\n\n\n<p>Defaulting on your mortgage affects you differently as a real estate investor. You aren&#8217;t losing the home you reside in, but instead the property you own as an investment. This could potentially leave your renters without a place to live and affect your future investment opportunities. Because of the effects on your credit score, it becomes challenging to borrow money for an investment property in the future.&nbsp;<\/p>\n\n\n\n<p>Most lenders already consider investment properties riskier, and if you have a history of default, they either won&#8217;t lend to you, or if they do, they will charge much higher interest rates and less attractive terms.<\/p>\n\n\n\n<p>The damage to your credit score won&#8217;t affect it for the full seven years it&#8217;s on your credit, but the fact that it&#8217;s in your history will affect lenders&#8217; decisions.&nbsp;<\/p>\n\n\n\n<p>In addition, defaulting on your mortgage decreases the home&#8217;s value, which may decrease the property values in the surrounding area, making the market less attractive.<\/p>\n\n\n\n<p>If you want to purchase another property in the future, you\u2019ll likely have to wait until you have a large down payment or restore your credit. Conventional lenders typically require borrowers to wait seven years after a foreclosure to try again, especially on an investment property.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Tips to Avoid Defaulting on a Mortgage<\/h2>\n\n\n\n<p>Now that you know the answer to \u201cwhat is a mortgage default,\u201d it&#8217;s time to learn how to avoid defaulting on a mortgage. While some circumstances are unavoidable, such as divorce, major medical issues, or unexpected death, there are some steps you can take to avoid default, including:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Make a large down payment:<\/strong> Don&#8217;t borrow more than you can afford. Wait to purchase an investment property until you have a sizeable down payment and can keep your mortgage payment affordable and within reason so you still profit on the property.<\/li>\n\n\n\n<li><strong>Talk to your lender:<\/strong> If you know you won&#8217;t be able to make a payment on time, contact your lender. Many offer repayment plans when you experience financial issues. Honesty and regular communication are key.<\/li>\n\n\n\n<li><strong>Sell the property:<\/strong> If you can&#8217;t afford the property or don&#8217;t have renters in it consistently, consider selling it. While the process won&#8217;t happen overnight, it can prevent you from losing the property in foreclosure.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">How Can I Get Out of Default?<\/h2>\n\n\n\n<p>If you\u2019re in default, communication with your lender is vital. Once you default on your mortgage, lenders position themselves to start the foreclosure process, but you can stop it with the following steps.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Request a repayment plan<\/h3>\n\n\n\n<p>Some lenders offer a repayment plan just for asking and being honest about your financial situation. This may include putting the past due amount at the back of your loan or temporarily reducing your monthly payments to make them more affordable.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Refinance the loan<\/h3>\n\n\n\n<p>If you know you can\u2019t afford the loan, consider <a href=\"https:\/\/www.biggerpockets.com\/guides\/how-to-refinance-your-mortgage\" target=\"_blank\" rel=\"noreferrer noopener\">refinancing<\/a>. This is best done before you miss a payment, but even afterward, you may be able to get more affordable terms.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Request a loan modification<\/h3>\n\n\n\n<p>Many lenders offer loan modifications, which is a change in your agreed-upon mortgage terms. This could include reducing your interest rate or extending the term without refinancing.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Short sale<\/h3>\n\n\n\n<p>If you don&#8217;t think your inability to make the payments is temporary, ask the lender if you can begin a short sale. With lender permission, you can sell the property for what you owe versus its actual value. The lender forgives the remaining balance, but there may be income tax consequences on that balance.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Forbearance&nbsp;<\/h3>\n\n\n\n<p>If you can&#8217;t make any payments and the situation is temporary, you may be able to request forbearance, which is a temporary halt to your payments, usually for up to 90 days. After the period ends, you must restart your regular payments and take care of the payments you missed. However, some lenders will tack that amount onto the back of the loan.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Final Thoughts&nbsp;<\/h2>\n\n\n\n<p>Defaulting on your mortgage can cause you to lose the property and seriously damage your credit. Fortunately, there are ways to work around it, especially if you stay in contact with your lender. If you notice yourself unable to keep up with the payments, it may be in your best interest to consider selling the property to avoid long-term damage to your credit.<\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_11082c790d03c8ea75980683bacf4d2c\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_de63ce34dd2bd69a94c9eb11581d3476\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_72f6e7539aa9c3be277d202dea07b955 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/what-is-a-mortgage-default&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/what-is-a-mortgage-default&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>If you don\u2019t meet the loan terms you agreed to when you closed on your mortgage, you are in mortgage default. The most common way is to miss your monthly principal and interest payments. <\/p>\n","protected":false},"author":613677,"featured_media":163636,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524,7119],"tags":[],"class_list":["post-163635","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/163635","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613677"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=163635"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/163635\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/163636"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=163635"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=163635"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=163635"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}