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Mortgage default is a loan status indicating a homeowner hasn’t fulfilled the required payments stated in their mortgage agreement. Failing to make monthly mortgage payments can have various consequences, from negatively impacting your credit history to potentially losing your home in foreclosure.
Homeowners experience various hardships that can lead to home loan default. Understanding what a mortgage loan default means and how to avoid it — as well as your options if you’re in the thick of it — can help you navigate this challenging situation.
In this article:
What is a mortgage loan default?
Like with other types of debt, a mortgage enters default status when a borrower doesn't adhere to the repayment terms in their promissory note. Reasons a lender might deem a home loan in default include:
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Missed monthly payments
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Unpaid property taxes
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Unpaid homeowners insurance
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Unapproved transfer of property title
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Unlawful use or acquisition of the property
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Negligent property damage or dilapidation that lowers the home value
Let’s say you’re struggling to keep up with mortgage payments. If you are 30 days late on your monthly payments, your account will become delinquent, which could result in a late fee and a hit to your credit score. Depending on the mortgage lender, you could be delinquent on your loan for 30 to 90 days before it enters default status. (Some lenders allow even more time.) Once you’re in default, more serious actions will be taken, such as collection attempt and starting the foreclosure process.
Read more: What is homeowners insurance, and how much does it cost?
What happens when you default on your mortgage?
The consequences of a mortgage loan default can vary based on your situation, state laws, and loan agreement terms. Below are a handful of events that can take place during a home loan default.
Missed payments and late fees
Maybe your mortgage lender or servicer has contacted you about missed monthly payments. This might include phone calls, a delinquency notice after your first missed payment, and tacked-on penalty fees for late payments that exceed the lender’s grace period.
Due to the unpaid interest and penalties that accrue, letting your mortgage go into default causes your debt to balloon.
Learn more: What to do if you have an underwater mortgage
Impact on your credit
One long-term effect of a mortgage default is that it shows up on your credit record for seven years. This mark lowers your credit score and is visible to all creditors who perform a credit check on your borrowing habits, for instance, if you’re applying for a new credit card or personal loan.
A default signals that you might be a risky borrower with a history of falling short of your promise to repay the debt based on the criteria set under your loan agreement. To mitigate this risk, lenders might charge you higher interest rates for the privilege or choose to deny your application altogether.
Pre-foreclosure
Depending on your state’s laws, loan servicers may be required to allow you to rectify the home loan default. This is called pre-foreclosure mediation. Some states that uphold this requirement include (but are not limited to) California, Florida, Illinois, Kentucky, and Wisconsin.
During this period, you can work with an independent mediator in good faith to resolve the default and reinstate your mortgage loan before the property officially undergoes foreclosure. As a borrower, this process is entirely voluntary, and to be successful, you and the lender must reach a mutually agreed upon settlement offer. Remember, however, that the lender is not obligated to accept your request.
Home foreclosure
If you and the lender cannot reach a negotiation agreement during the mediation phase, the property moves on to foreclosure. Depending on the terms of the loan agreement and state laws, the lender will file for foreclosure through a judicial hearing against the homeowner or execute a nonjudicial foreclosure that doesn’t require a legal proceeding.
Lenders or servicers who are awarded judgment in their favor during a judicial foreclosure — or have fulfilled the requirements of a nonjudicial foreclosure — can then move forward to advertise the sale of the property.
Read more: What to expect when facing foreclosure
Acceleration of debt
During a mortgage loan default, a lender might choose to invoke the acceleration clause on your home loan agreement. This clause gives the lender the right to demand full repayment of the unpaid loan principal interest charges to date. If the foreclosure process has begun but hasn’t closed yet, you can choose to pay the entirety of the accelerated debt to halt the foreclosure and cure the mortgage default.
Some reasons for debt acceleration include events like a borrower filing bankruptcy, not paying property taxes, or continuing to miss monthly mortgage payments.
How to avoid home loan default
You might experience a mortgage default due to a string of events that are out of your control. For example, a sudden and severe loss of income or unexpected medical bills might strain your resources, leaving you unable to afford your mortgage payments.
Depending on your situation, you might be able to strengthen your financial stability before these difficult scenarios hit or get support earlier in the process to avoid a mortgage loan default. Here are some tips for avoiding a mortgage default:
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Build your emergency savings. One way to weather unplanned financial turbulence is to have a comfortable financial safety net ready. Based on your budget, set aside a manageable and reasonable amount of emergency savings If a financial crisis arises, you’ll have some money to put toward your mortgage payments until you get back on your feet.
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Contact your lender ASAP. If you have the slightest inkling that you might not be able to make a monthly payment, contact your mortgage lender or servicer immediately. If you just need an extra few days to get your funds or are dealing with a short-term hardship, for example, the company might extend your grace period or put your loan into temporary forbearance to avoid delinquency.
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Refinance your mortgage loan. If you haven’t missed 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 your original one. This new mortgage has a different term length and interest rate. Depending on the refinance and your qualifications, this might help you secure a lower mortgage rate or lower payment.
Learn more: The best mortgage refinance lenders
3 options if you’re already in mortgage default
Even if you’re in the midst of a mortgage default, you might still have options to soften the blow in the short term. However, remember that all the paths below can negatively impact your credit.
1. Loan modification
If you have defaulted on your mortgage or are in danger of doing so, loan modification could be a solution — if your lender is amenable to it. While refinancing replaces your original mortgage with a new one, modifying changes your existing home loan. It changes repayment details in your loan agreement in the short or long term. Modifications might include a temporary mortgage rate reduction or extending your loan term.
This approach has its share of caveats, including potentially paying more toward your home over time if your lender gives you a longer loan term.
Read more: How to apply for loan modification if you’re struggling to make monthly mortgage payments
2. Short sale
A short sale could be the answer for cash-strapped homeowners if you currently owe more than your house is worth. In a short sale, the homeowner voluntarily agrees to sell the home and direct the sale proceeds to the lender. In exchange, the lender agrees to lift the lien on the property.
Unless the lender agrees to forgive the deficit, the homeowner is still liable for any outstanding debt on the unpaid mortgage loan. Additionally, if the lender forgives any amount, it might be considered taxable income on your tax return.
Learn more: How a short sale in real estate works
3. Bankruptcy
Another option, if your mortgage is in default (or could be soon), is filing for bankruptcy. Bankruptcy requires a court proceeding, and during this time, the lender's efforts to foreclose on the property are paused.
Chapter 7 bankruptcy is only available if you are current on your monthly payments, so it’s for homeowners who are in danger of defaulting but haven’t reached that point yet. Under Chapter 7 bankruptcy, your assets are liquidated and mortgage obligation is lifted, but you could still lose your home to foreclosure if you continue to miss payments. Alternatively, a Chapter 13 bankruptcy lets you cure your mortgage default over time through a court-approved payment plan over three to five years.
Dig deeper: Can you file for bankruptcy and keep your house?
Mortgage default FAQs
What happens when your mortgage defaults?
When your mortgage loan defaults, your lender can take certain actions, such as accelerating the debt so it’s due up-front instead of through installment payments over your loan’s term. It can also initiate a foreclosure on the house, and you may lose your home if you don’t resolve the default.
What happens if you are 3 months behind on your mortgage?
After missing one mortgage payment, the account status is likely considered “delinquent” on your credit report. After three months of non-payments on your mortgage loan, your lender might initiate foreclosure. If left unresolved, the continued non-payment can result in the lender taking possession of and selling your home to recoup the loss.
What are my options if I can’t pay my mortgage?
If you can’t pay your mortgage, contact your lender or loan servicer immediately to learn about your options. For example, you might have access to short-term forbearance or loan modification that helps make repayment more financially manageable. Examples of modifications include extending the home loan’s repayment term or temporarily lowering the mortgage rate.
This article was edited by Laura Grace Tarpley.
