Mortgage default: How to save your home from foreclosure

With interest rates soaring to 15-year highs and default rates inching higher, keeping up with mortgage payments is becoming too much to handle for many homeowners.

Eager first-time homebuyers who bought at the top of the market have been especially hit hard by the sharp rise in rates.

If you are facing financial hardships and worried you’ll fall behind on payments in the near future, it’s best to get ahead of the situation.

Thankfully, there are many avenues you can take to avoid mortgage default and foreclosure.

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What does it mean to default on your mortgage?

Defaulting on your mortgage occurs when you violate one or several terms in your mortgage contract, such as:

Missing a payment(s): Mortgage delinquency is the most common reason that people default on their mortgage. If you have monthly mortgage payments past due for more than 30 days, you’re at risk of defaulting on your mortgage.

Failing to pay property taxes or homeowners insurance: Staying on top of your property taxes and insurance will ensure that your mortgage agreement remains valid.

Failing to maintain the property: If your property reaches a state of disrepair, your lender would have it in their rights to put you into mortgage default.

Selling without the bank’s permission: If you transfer the deed of your property to another party without your lender’s permission, they may accelerate the debt.

If you default on your mortgage, your lender can take legal action to reclaim the property. If you don't take action to remedy the default (i.e. pay the outstanding balance), the lender will eventually foreclose on your home. Once the lender forecloses, they can take the property, sell it at auction, or turn it over to a third party. If you default on your mortgage, you could lose your home and any money you have invested in it.

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What are the consequences of defaulting on a mortgage?

Defaulting on your mortgage carries many drawbacks and risks, including:

Losing your home - the most obvious and damaging consequence of mortgage default is the risk of losing your home. This could happen in foreclosure, or you may choose to hand over your deed in lieu of foreclosure.

Damaging your credit score - delinquent payments and modified loan terms, such as a short refinance, will hurt your credit score.

Being forced to short sale - you may be forced to sell your home, even if it’s worth less than what you owe.

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How to avoid mortgage default - without selling

If you foresee yourself falling behind on your mortgage payments, there are a few steps you can take to improve your financial position.

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Cut costs

Take a hard look at your monthly expenses and try to cut back on anything that isn’t deemed essential. This may mean sacrificing sources of entertainment, a yearly vacation, or certain luxuries. Moreover, you may be able to negotiate a lower energy bill or cell phone bill.

Learn more about cutting costs here →

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Consolidate debt

High-interest debt can take a serious toll on your finances and put you at risk of mortgage default. There are several ways to prioritize paying off high-interest debt, but you will likely need to make a significant financial commitment. It’s also important to prioritize financial security over convenience when choosing how to pay off high-interest debt.

Learn more about consolidating debt here →

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Increase income

Making more money is easier said than done. However, if you have an in-demand job or you’re working in a market with a labor shortage, you may have more bargaining power than you think. Use this salary calculator from PayScale to see how much money other workers in your field are making. If you aren’t being compensated fairly, it may merit a conversation with your boss.

Outside of getting a raise, you may want to consider getting a seasonal part-time job. It’s never easy to take on more hours or spend time away from family, but if you’re in the position to work a few more hours a week, it may be the best way to keep your mortgage in good standing.

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Apply for a loan modification

A loan modification, such as a lower interest rate or longer mortgage term, could result in a lower mortgage payment. In order to receive one, you must speak with your lender and prove that a change in your financial position has disrupted your ability to pay your mortgage as it currently stands. Your lender will review your application and grant a loan modification at their discretion. 

Unlike a refinance, a loan modification is an agreement made with your current lender, and generally includes terms that wouldn’t be granted if you shopped with another lender. Unlike forbearance, a loan modification implies a permanent change to your loan terms, rather than a temporary pause on mortgage payments.

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Refinance

Once upon a time (i.e. before the 2022 rate hikes), it wasn’t uncommon for long-term mortgage holders to refinance to a lower rate. However, since rates have gone up, the prospect of getting a lower rate by refinancing is quite slim. However, there are still some advantages to be seen with certain products on the market.

Some homeowners may find relief in home loans and HELOCs with no required payments, such as the Fraction Mortgage. If you have enough equity (generally 60%+), these solutions allow you to pause monthly payments on your mortgage for at least 5 years. Keep in mind, interest will compound on the amount you borrow, and you will have to pay or refinance to settle the balance at the end of the term. Still, a pause on payments can be a godsend for homeowners looking to improve their financial position.

Learn more about refinancing with Fraction here →

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How to avoid foreclosure

If you’re already in mortgage default, the threat of foreclosure may be looming. Don’t panic yet, because there are still plenty of things you can do to improve your financial position.

However, keep in mind that these solutions may not fix the underlying issue. You may have to make more drastic changes to your spending habits or lifestyle to ensure financial stability.

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Mortgage Reinstatement

If you have enough funds to pay back your late payments and fees, then a mortgage reinstatement may be the way to go. And thankfully, the process is quite simple. You simply send your lender the outstanding balance plus any fees. Once the payment is received by the lender, your mortgage will be reinstated, and you will resume regular monthly payments.

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Borrow equity

Home prices have gone up quite a bit in the last few years, which means you may have considerable equity in your home or real estate holdings. Rather than selling your home(s), you can borrow some of your home equity to cover the balance owed.

It’s true that taking out a traditional HELOC or refinancing would likely result in higher payments. However, a payment-optional home equity solution, like a reverse mortgage or Fraction Mortgage, could provide relief if you have had a disruption to income and/or don’t want to sell your home. The right loan type for you will depend on your current position and future plans for your property.

Compare your options: Fraction Mortgage vs. reverse mortgage →

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Loan modification

As previously mentioned, a loan modification can help you manage your mortgage before you enter default. Thankfully, it is still a viable option if your mortgage lender has accelerated the debt. In fact, your lender is more likely to approve a loan modification if there is a clear foreclosure risk, as doing so is often more economical for the lender than foreclosing on the home.

Loan modifications often include a lower interest rate and/or a longer mortgage term, which in turn would lower your mortgage payment. However, a loan modification may mean that the borrower will pay more interest over the lifetime of the loan.

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Short refinance

A short refinance is often only considered when the borrower is “underwater” on their mortgage and in loan default. That is, the amount owed on the mortgage is greater than the value of the property. It is unlike a loan modification in that the lender does not discount the interest rate or term length, but rather agrees to a lower loan amount.

In a short refinance, the difference between the new loan and the old loan amount is often forgiven by the lender, helping the borrower overcome their underwater position. This means, however, the borrower’s credit score could take a hit.

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Forbearance

Forbearance is a temporary pause of mortgage payments, a process that must be agreed to by your lender. The pause on payments can give the borrower a window to pay down their other debts or improve their financial position before resuming their regular mortgage schedule.

During COVID-19, defaults on mortgage loans spiked to nearly 10% but foreclosures remained relatively low. That was because the US government imposed a moratorium on foreclosures and evictions. Anyone who was defaulting on their mortgage was automatically given forbearance.

In 2022, forbearance is still a viable option, but not one that comes so easily. Once you’ve defaulted, you should contact your lender to negotiate whether you can receive forbearance for your mortgage. This will give you relief in the short term and allow you time to develop a repayment plan to cover the outstanding balance.

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The foreclosure process

Let’s take a look at how a foreclosure would play out if you missed a mortgage payment.

Keep in mind the foreclosure process, and timelines differ between states and jurisdictions. It’s best to read up on your state’s foreclosure laws before taking action.

Moreover, missing a payment isn’t the only way to default on your mortgage. Scroll back up to the first half of the post to review all the ways you could default on your mortgage.

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Day 0-10: Missed payment

In approximately the first 10 days since your missed payment, you will have a grace period in which you will not accrue any late payment penalties or warning of default.

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Day 10-30: Late fees

After approximately 2 weeks, it’s likely that your lender will begin to charge you late fees on your missed payment. At this point, you still have time to remedy the issue before entering default position.

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Day 30: Default

After 30 days delinquent, you will be in default, and the next step in the foreclosure process will speed up. In order to prevent the foreclosure process from beginning much sooner, you should talk to your lender or a housing counselor about the various options and solutions that are available at your current stage.

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Day 90-180: Foreclosure

In most states, the lender will begin the foreclosure process after a waiting period of 90 to 120 days following the missed payment. In the case of a judicial foreclosure, the lender will begin the foreclosure process by filing a suit against you (the borrower) and sending you a letter demanding payment. If you do not respond with payment within 30 days, foreclosure will occur, and the lender will take possession of your property.

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Don’t panic, you still have options.

If you are having money problems, you should first speak with your lender to see if they are open to negotiating with you. You may avoid defaulting or foreclosure by taking advantage of several options, including loan modifications, forbearance, and short refinance.

If your lender is unwilling to negotiate, you may have to make some tough decisions. You could sell your home to cover the outstanding amount owed, or you could try to refinance your mortgage with a new lender. If you don’t want to sell but have built up significant equity, you may want to consider a reverse mortgage or Fraction Mortgage to buy yourself some time.

Compare your options: Fraction Mortgage vs. reverse mortgage →

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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.