You’re a homeowner. Congratulations! You’re sailing into a future of personal security and equity building…that is…unless something goes wrong for you financially. Remember the global financial crisis of the last decade during which thousands of people lost their homes to foreclosure? What would happen to you if you found yourself suddenly unable to make your mortgage payments? That’s what we’re here to explain. If your mortgage payments are stretching your thin, here’s what can go wrong, and how to recover from it.
What Happens if You Miss A Mortgage Payment?
Let’s say you lose your job or get hit by a bus. Suddenly your income stream grinds to a half and you miss one monthly payment. If you manage to recover quickly and get that overdue payment paid, you’ll be fine. If not, things can start to spiral out of control.
When you miss a payment, you are in “default status”. It is important for you to contact your lender immediately. If you need an extension, you can often get one without penalty. It is common to be granted a 15 day grace period. If you pay within these two-weeks-and-a-day, you’re in the clear. If you fail to pay, and then miss another payment, things get more complicated.
When you miss a second mortgage payment, you will receive a “demand letter” from your lender. You will typically be given 30 days to clear your outstanding balance, after which time your lender will take their grievance to the next level.
What Happens if You Don’t Pay Your Mortgage for 90 Days?
After 90 days, you have missed 3 payments, or are about to do so. About this time, you will receive a “Notice of default” in the mail – a document your lender is legally required to send you so that you have no excuse for ignorance about what comes next. Here begins the foreclosure process. The owner typically has 90 more days before they’re out on the street at this point. If you can find the money to pay back the missed payments, you can bring your mortgage up to date. If not….
Preparation for the Sale of Your Home
After 90 more days of nonpayment (180 days total), you will receive a “trustee’s sale notice”. This informs you that your home will be sold in order to pay back the institutions that lent you their money. Local media will advertise your home for sale. This can be very embarrassing.
An auction date will be set for the sale of your home. At auction, the opening bid will be the sum of all liens, outstanding payments, and other fees you owe to various parties. In the event that the sale of your house can’t service all debts, you will have what is called a “short sale”. In a short sale, your lenders basically just take what they can get, and you lose your home and all the equity therein.
Your house may not be sold, but the ownership might be given to a bank (usually the bank that issued you your mortgage loan). That bank/lender will organize your eviction, which could happen immediately or some time down the road. If you don’t leave, local law enforcement can force you out. All belongings left in the property will be stored, and only released after the payment of a fee.
What Should I Do If I Can’t Pay My Mortgage?
Obviously, that is a terrible outcome. So how do you avoid it?
The obvious answer is never to let your mortgage go unpaid. If you find yourself unable to pay, let your lender know what is going on. Communication is key in this situation! You’ve got to remember, the representatives at your bank are human beings, and the lender just wants to get its money. You can likely set up a structured payment, a generous grace period, or another arrangement that works with your needs. Don’t leave your lender in the dark. They may assume the worst and penalize more severely than they would if you had informed them of your difficulty.
Try never to miss more than one payment. Missing two payments limits your options significantly, and you may experience expedited foreclosure if you miss three. We hope you never have to go down this road, but if you do, at least you’ll know what to expect.
Andrew Black is a finance writer, copywriter, and editor. He lives in Baltimore, MD with his wife, cat, and giant schnauzer.