Mortgage delinquency is a term used to describe the state of a mortgage when the borrower falls behind on their payments. This can happen for a variety of reasons, and it can lead to plenty of consequences and stress. Left unaddressed, mortgage delinquency can lead to foreclosure proceedings.
If you’ve begun to fall behind on your mortgage, or are worried that you may be in danger of becoming delinquent, you can’t ignore it. But what does it mean, and what can you do? From common causes and risks to solutions, this article will fill you in on all you need to know about mortgage delinquency.
Mortgage Delinquency, Explained
Mortgage delinquency occurs when a borrower falls behind on their mortgage payments. This may happen for several reasons, including forgetting to mail a payment, job loss, illness or other financial hardships.
If you’re struggling to make your mortgage payments, resolving the matter as soon as possible should be your first priority. Delinquency can eventually result in default, and the lender may choose to begin the foreclosure process.
Even though mortgage delinquencies have fallen below 1% in the past few years,[1] largely due to the foreclosure moratorium and other assistance provided to consumers during the pandemic, delinquencies are expected to rise again. It’s important to be aware of the risks and solutions associated with delinquent payments.
A mortgage default occurs when you fail to solve delinquency and still haven’t paid your mortgage in over 90 days.
What Happens When a Mortgage Is Delinquent
Being delinquent on your mortgage can lead to several consequences. You could face late fees, damage to your credit score, difficulty refinancing or buying a new home and the possibility of losing your home through foreclosure.
Let’s explore each item to better understand the consequences of missed payments on a mortgage.
Late fees
Delinquency on your mortgage may result in late fees. Depending on the terms of your mortgage and state law, these late fees could add between 3% – 6% to your monthly mortgage payment.
Damage to credit score
Mortgage delinquency beyond 30 days may lower your credit score.[2] The longer your payment is delinquent, the greater the effect it will have on your credit. This can have a ripple effect on your ability to borrow money in the future for large purchases like a car or future home loans.
Difficulty refinancing or buying a new home
Mortgage delinquency can make it difficult to refinance your home or buy a new home. Your lender will pull your credit report as part of their due diligence. Delinquent payments, especially more than one, can be a big red flag for lenders. Depending on how many monthly payments were missed, you may see higher interest rates or have trouble qualifying entirely.
Foreclosure
The most severe consequence of mortgage delinquency is foreclosure. If you fall too far behind on your mortgage payments and default, your lender may begin the foreclosure process. This is a legal process that allows them to repossess your home and sell it to cover the outstanding balance of your loan.
If you’re struggling to make your mortgage payments, it’s important to reach out to your lender as soon as possible to discuss your options.
Options To Take if Your Mortgage Is Delinquent
Falling behind on your mortgage can be dispiriting, but it is often a solvable problem.
You can take several actions to avoid foreclosure if your mortgage has gone into delinquency. The most beneficial thing you can do is to reach out to your loan servicer as soon as possible and maintain an open, cooperative line of communication with them.
With communication and cooperation at the forefront of your mind, here are 4 steps you can take if you are behind on your monthly payments:
Renegotiate the loan
If you have trouble making your mortgage payments, you can speak with your loan servicer about a loan modification. This process allows you to renegotiate the terms of your loan. The loan modification process may change aspects of your loan, such as the amount you must pay each month or the length of time you have to pay it back. These adjustments are intended to help you become and remain current.
Seek forbearance
Mortgage forbearance is a process where your lender allows you to temporarily stop making your mortgage payments. Your lender may extend this option if you are experiencing a short-term financial hardship. During the forbearance period, your lender will not add any late fees to your account, but interest will continue to accrue on your loan.
When the forbearance period is over, you will be expected to make up the deferred payments, plus any interest that accrued during that time.
Sell the property
One way to overcome default is to sell the home entirely. It may seem drastic, but if your home has become unaffordable due to a change in circumstances, it may be time to consider listing your home. Downsizing to a more manageable property may be the best way to exit delinquency and get out from under an unmanageable mortgage payment.
Selling your home for less than the mortgage balance. If you need to sell and owe more than your home is worth, your lender may allow this instead of foreclosure.
Speak with a credit counseling agency
If you’re feeling overwhelmed and aren’t sure what to do, seek out the assistance of a credit counseling agency. These agencies are typically nonprofit organizations that can provide you with free debt and housing counseling.
Doing this may demonstrate your determination to your loan servicer. A credit counselor can help assess your current financial situation and develop a plan to get you back on track. They can also explore options to help you with other financial obligations, like credit cards, too.
How To Avoid Mortgage Delinquency
Let’s say you aren’t behind just yet. Instead, you want to be proactive and educate yourself. Or maybe you’re already delinquent and want to avoid foreclosure. Whatever the case, here are four steps you can take to keep current on your mortgage:
Know what you can afford
When shopping for a home, it’s important to remember how much house you can afford. It’s easy to justify spending an additional $50,000 on a home when it translates to a little over $100 each month. But remember, that increased payment is due, plus interest, for the life of the loan.
It’s best to make a budget of what you can comfortably afford now, not what you think you can afford later. Sticking to that budget will help you prevent future financial troubles.
Unfortunately, many homeowners buy their homes based on what their lender told them they could qualify for based on their income. Instead, flip the script on the lender by telling them how much you want based on your budget and goals.
Understand additional expenses you’ll have
When you’re budgeting for your mortgage, be sure to include all the additional costs you may have as a homeowner, like homeowners insurance, mortgage insurance, property taxes, HOA fees and regular home maintenance. These expenses can add up quickly, so it’s best to prepare for them.
Talk to your lender as soon as possible
Did you know that most mortgage lenders have entire departments dedicated to helping people avoid delinquency? From preventing the first late payment to helping you avoid default, they’re prepared for it all.
Lenders want to help you stay on track, so the best way to avoid delinquency is to be proactive and speak to your lender at the first sign of difficulty making your mortgage payments.
Make more and spend less
A strained budget is at the root of nearly every mortgage that falls behind. To avoid delinquency, look for ways to make more and spend less. Consider a side hustle or turning a hobby or special skill into a business opportunity.
In addition to earning more, look for opportunities to reduce your expenses. If you’re not already doing so, track monthly spending and create a budget. This will help you understand where your money goes.
When In Doubt, Seek Help
Across the United States, mortgage delinquency is a real issue for many homeowners. If you’re struggling to make your monthly mortgage payments, know that you’re not alone. There are options and resources available to help you through this difficult time.
Homeowners who have already fallen behind should take immediate action to get their loans back in good standing. For those who have not yet fallen behind, but are concerned that they might, it’s important to take preventative measures.
This includes staying mindful of how much house you can afford, understanding additional expenses you’ll have as a homeowner and talking to your lender at the first sign of difficulty making mortgage payments. You’ll be more likely to keep your home loan in good standing by taking these steps.
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Consumer Financial Protection Bureau. “Mortgage Performance Trends.” Retrieved May 2022 from https://www.consumerfinance.gov/data-research/mortgage-performance-trends/
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Experian™. “When Do Late Payments Become Delinquent?” Retrieved May 2022 from https://www.experian.com/blogs/ask-experian/when-does-debt-become-delinquent