Getting a mortgage requires a big commitment. It is a big responsibility that you need to take care of for many years. But at some point in long-term commitments, there will come a time when you experience hardships and can no longer fulfill your responsibilities. It may be because of a sudden health issue or loss of employment.
You can always prepare for financial emergencies but there are certain prolonged periods of hardship that can lead to trouble in keeping up with mortgage payments. At this point, some people may feel that they have no other choice but to default on their mortgage payments.
It may not be something that you planned on doing but it may be the only option that you have. But what does it mean? And what happens after you default?
Defining Mortgage Default
Missing just one payment will only be considered a delinquency, which will warrant a warning letter from the lender to one of the three major credit bureaus. A default happens when a borrower fails to pay the repayment on a home loan after a 30-day period.
When you fail to make as many as three or more of your home loan payments, your mortgage will normally move into a default status, which is not pretty.
Consequences of Defaulting
There are several consequences that you can expect once you default on your mortgage payments.
Your Credit Score Might Dip. Once you default on your mortgage payment, just like missing credit card payments, your credit score is sure to take a dip. Payment history makes up 35 percent of your FICO score. Payments past the deadline, or missed payments altogether, will knock several points off of your credit score – but that’s still considered light. Defaulting on a payment is the first of many steps toward foreclosure. If your home does end up being foreclosed in the future, the effect on your credit score will stay on your credit report for up to seven years, which will hurt your chances of obtaining new credit or loan.
You Might Get Sued. When there is still a substantial amount of money left to pay after you defaulted on your payments, the lender might decide to sue you for collections through a “deficiency judgment.” A “deficiency judgment” will require you to pay the difference between the home’s fair market value and what you still owe on the mortgage. This judgment will differ depending on the state, however, with some states not allowing it altogether. You should be aware of any possibility that this might happen to you if your state does allow the judgment.
You Might Need to Pay More Taxes. The Mortgage Forgiveness Debt Relief Act of 2007 was created to allow homeowners who lost their homes through short sales or foreclosures to escape a major tax penalty for mortgage debt that was forgiven. Before the bill was enacted, all cancelled debt, including mortgage, was counted as income unless you qualified for an exemption. Unfortunately, the Act expired by the end of 2013 with no extensions clearly in sight. This means defaulting on your mortgage might come around to haunt you at tax time.
You Might End Up Filing for Bankruptcy. There might be certain situations that might necessitate filing for bankruptcy. First is if you end up getting sued amidst all your money troubles, you end up filing for bankruptcy due to all your financial obligations. Second is if you end up going to court due to the lawsuit and you need to show that you’re judgment-proof, which means postponing your lender’s ability to attack your bank accounts. This means filing for bankruptcy to protect you from the judgment. However, this might hurt your score even more.