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Did you know that millions of homeowners are upside down on their loans? Even though the housing market has seen some steady improvement, plenty default on mortgage.
This happens when you reach a point where your monthly payments become too much to handle. If you have lost faith that there is no way to rebuild lost equity, foreclosure becomes a real possibility.
Here is everything you need to know about what happens during a mortgage default and why you should never miss mortgage payments.
What Happens When Default on Mortgage?
It is no secret that defaulting on a mortgage loan will cause your credit score to go into a nosedive. Remember that payment history makes up around 35% or more of your FICO score.
This significant figure can go up or down depending on how you make payments. Your credit score should be healthy if you are always on time. However, even one missed payment can cause a ding in your credit score.
The good news is that not all is lost. If you are stressed about missing payments, securing funds to avoid a home foreclosure is always best. This is because a home foreclosure will be the final nail in the coffin of your credit score.
Foreclosures are also dangerous because they can stay on your credit record for up to 7 years. This can impact your ability to get new credit.
Therefore, you should check out these private hard money lenders to avoid issues while renting an apartment or getting a utility service. Otherwise, you may have to pay much higher deposits for the next 7 years if you are not careful.
Avoid Getting Sued
If you walk away from a property and there is a lot left on the loan balance, your lender may sue you to collect what is owed to them. They will seek a “deficiency judgment” that will require you to fork up any difference between what you owe your mortgage provider and the property’s fair market value.
However, not every state allows the use of deficiency judgments. If your state has such a policy, you need to be aware of the possibility that your lender may press legal charges if you miss mortgage payments. Then you can also expect to see a lot of collection notices show up in the mail.
Increased Tax Bill
If you are celebrating not getting sued, it does not mean that the problems are over. If you default on your mortgage and there is a lot of money owed, this could come back to bite you during tax time.
Even if your lender does not press charges or pursue a deficiency judgment, canceled debt gets counted as income for tax purposes, unless you have an exemption or qualify for an exception.
The Mortgage Forgiveness Debt Relief Act was enacted in 2007 to let homeowners escape a massive tax penalty if they lost their properties due to foreclosures or distress sales.
The act expired in 2013, but it has been extended each year instead. So, it is essential to avoid dealing with a home foreclosure.
Remember that even if you avoid getting sued, you can still get hit with a huge tax bill. Then you could risk ending up in a bigger debt than before.
File for Bankruptcy
There may be situations where you know in advance that your lender will come after you to get their money after a foreclosure. This is when your options become limited.
You can negotiate a payment arrangement or settlement to help you avoid a lawsuit. Or you will have to go to court to settle the matter. If this happens, you should show that you are judgment-proof.
This will help postpone your lender’s ability to garnish your wages or attack your accounts. To truly eliminate judgment entirely, you will need to file for bankruptcy.
This is where Chapter 7, or liquidation bankruptcy, becomes the best option. Even though debts you include in your filing get wiped out, you will still have to turn over some assets to the court.
This is where the court will sell your assets to help pay creditors. It is essential to note that Chapter 7 is not an easy way to escape financial problems.
It will stay on your credit report for up to a decade. Then your credit score could be dragged down even further. Especially if you already have a foreclosure showing in your records.
How to Avoid Mortgage Default?
The first step to avoiding mortgage default is never borrowing more than you need. You must minimize your loan debt by cautiously reviewing your budget.
Even if you can get approved for a higher loan, it is never worth taking on too much debt that you cannot handle. Always be aware of your responsibilities and rights.
Before you sign a mortgage agreement, confirm that you understand all the terms. Never hesitate to ask your lender to answer questions about your repayments.
It also helps to stay in touch with your lender to inform them about your situation. This way, you can negotiate repayment terms or ask for more time instead of dealing with a lawsuit if you default on your payments.
Many lenders will always prefer working with you instead of taking back the property. This is because they want to avoid incurring extra costs and the hassle of reselling the property to recover funds.
The legal process can also be time-consuming and expensive, so it is best to contact them to discuss available options. They might give you time to borrow funds elsewhere to pay your mortgage.
Avoid Home Foreclosure Today
Now that you know what happens when you default on mortgage, it is time to reach out and speak to your lender. Remember that many people fall behind on repayments, so you are not alone.
Always make it a priority to negotiate terms and catch up on your payments as quickly as possible.
The quicker you recoup, the easier it will be to prevent foreclosure or bankruptcy. If you enjoyed reading this mortgage guide, check out some of our other posts.
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