Mortgage Delinquency: What It Is And What It Means
Life can come at you fast. If you lose your job or have another event that puts a strain on your finances, it can be easy to fall behind on your house payment. This is referred to as mortgage delinquency.
We’ll go over what mortgage delinquency is, what to expect if your loan becomes delinquent and your options for dealing with a delinquency.
What Is Mortgage Delinquency?
A mortgage delinquency occurs when the borrower doesn’t make their payment within 30 days of the due date.
The due date for your payment will be specified in your mortgage documentation, but if you pay monthly, it’s usually the first of every month. Most mortgage contracts also have a grace period after which you can make your payment without having to pay a late fee.
A mortgage is not considered officially delinquent until you have been behind on your payment for 30 days or more. It’s at that point that your mortgage servicer – the entity you make your payments to – is required to make a report to the credit bureaus.
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What Happens To A Delinquent Mortgage?
If your mortgage becomes delinquent, there are several events that trigger:
- It hurts your credit score. The late payment will be reported to the credit bureaus, negatively impacting your credit score. A late payment can stay on your credit report and impact your score for up to 7 years. There is a particularly harsh impact on your score if you credit was previously unblemished. While being 30 days late is bad, being 60 days late is worse and so on.
- Fees can add up. For every payment made after the grace period, there’s a late fee. In addition to late fees, there could be legal fees involved with a foreclosure process, or property inspection fees to ensure the home or collateral against the loan is being occupied and maintained. On top of that, there could be more fees if the lender has to take action to maintain a vacant property themselves.
- It could lead to the loss of your house. If you miss enough payments, you could lose your house to foreclosure. In general, this doesn’t happen until you are more than 120 days late on your mortgage payment, although there are instances in which the timeline may be sooner (such as for violation of the due-on-sale clause).
What To Do If You Have A Mortgage Delinquency
If you think you may miss your mortgage payment, you should reach out to your mortgage servicer immediately to explain your situation and determine what your options might be to keep you in your home. Your mortgage servicer is the company you make your payment to and may or may not be your original lender.
Lenders want you to be able to stay in your home if at all possible. If you’re having trouble with your mortgage payment, reach out to your mortgage servicer is possible.
Agree To Forbearance
Mortgage forbearance involves a temporary pause in your mortgage payment. The general idea here is that you don’t have to worry about your mortgage payment while working through your financial hardship. This is often the first option available to many borrowers, particularly if the hardship will be temporary in nature.
There are a couple of things clients should know up front about forbearance. First, the payments that would have been originally due during the pause have to be paid back. You may qualify to do this in one of several ways we’ll get to in the following sections. Your options generally depend on your financial situation and the circumstances that led to forbearance.
Second, a forbearance is usually going to have a negative impact on your credit. However, this is better than missing several payments and possibly losing your home. There are a couple of exceptions where your credit isn’t harmed. If you have questions regarding whether any forbearance you may qualify for will impact your credit, contact your mortgage servicer.
If you qualify for forbearance, it’s still best to make as much of your payment as possible. This will help you resolve the mortgage delinquency when the forbearance ends by increasing the options you may qualify for.
See If You Qualify For Deferral Or Partial Claim
Under some circumstances, after your forbearance, you may qualify to delay a certain number of payments until you refinance, sell your home or otherwise pay off your mortgage. Depending on the type of mortgage you have, this is either called a deferral or partial claim. For practical purposes, they mean the same thing from a borrower’s perspective.
Establish A Repayment Plan With Your Lender
The next thing to look at qualifying for is a repayment plan. Under this option, you pay a little bit more for your mortgage every month until your past-due balance is paid off. This is usually set up to happen over a certain number of months.
Note, these repayment plans are typically 1 – 3 months and the payments can be significantly higher than a regular mortgage payment. This high payment can make a repayment plan difficult to qualify for because it can put a great strain on your finances.
Modify The Original Loan
Another potential avenue for qualification may be a loan modification. In a mortgage modification, changes are made to the original loan terms in order to help with payment affordability. As part of a modification, both the length of time it takes to pay off the loan and the interest rate may be changed.
Most modifications impact your credit, though not as much as a foreclosure.
Reinstatement
The fastest way to resolve your delinquency is to reinstate your mortgage. A reinstatement is paying back the full amount past due at the conclusion of your forbearance. While this may not be realistic for everyone, if you’re in a situation where it’s possible, reinstatement is the best option to keep your mortgage on its current loan term and interest rate, and there is not an additional credit impact.
As an example, maybe you’ve had to defer some salary for a while and then your employer pays you back. You can use those funds to reinstate your mortgage.
Sell The House In A Short Sale
If after evaluating all your options, it’s determined that there was no realistic path to you staying in your home, there are a few options that are preferable to a full foreclosure. One of them is a short sale.
A short sale is a sale in which the lender agrees to take less than what you owe on the mortgage in order to get something out of the sale without having to spend the time and expense involved in a foreclosure. The lender will review offers for approval or denial and must manage the sale.
The big advantage of a short sale for a borrower is that the credit impact isn’t as severe as it would be with a foreclosure. In fact, you may be able to qualify for a mortgage again right away if you’re getting an FHA loan and you didn’t miss any mortgage or installment payments in the 12 months prior to the short sale date or in the year prior to applying for your new mortgage. Otherwise, the minimum waiting period for most people with a past short sale is 3 years (2 if you qualify for a VA loan).
Deed-In-Lieu Of Foreclosure
A deed-in-lieu of foreclosure is when you choose to sign the property over to a lender. While there are still deadlines and requirements to vacate the premises, a deed-in-lieu can be less traumatic. You will need to have the property in a specific condition to get approved for this option.
As an additional benefit, you can get a new conventional mortgage after waiting 4 years with a deed-in-lieu rather than the 7 years necessary after a full foreclosure. Another benefit is that you could qualify for a cash for keys program. These programs will give you cash for getting the property in the right condition and handing over the keys.
Foreclosure
A traditional foreclosure involves eviction from your home and the lender taking possession of the property. It’s the most extreme of the options, so lenders will do everything they can to stop a foreclosure before it comes to pass. These are only used when no other solution can be reached by other means by the lender and borrower.
These also have the most drastic consequences on both your credit score and history. If you have a foreclosure on your record, you could have to wait as long as 7 years to get a new mortgage depending on the type of loan you’re looking at.
The Bottom Line
If you’re behind or about to be behind on your mortgage, there are several potential solutions to help you cure your mortgage delinquency. You can also check out our guide to payment assistance for more information.
