By Julie Ryan Evans

Jul 20, 2023

(Photo-Illustration by; Source: Getty Images)

If you’ve got a mortgage, we hope your mama hammered home how important it is to make those mortgage payments on time, every month.

This is not the kind of thing you want to let slide, folks! Still, life isn’t a fairy tale (sadly), and not all mortgages end happily ever after.

Sometimes people just can’t pay their home loan and end up in mortgage default. Here’s what you need to know, and how to stay out of this scary scenario.

What is a mortgage default?

To default on one’s mortgage means not meeting the terms in the home loan agreement, says Casey Fleming, mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage.” Missing or late payments are the most common problems, of course, but they’re hardly the only infractions that land homeowners in hot water.

Homeowners can also default on mortgages for not paying property taxes, or lacking homeowners insurance, or using their home for illegal activities like, say, dealing cocaine. In other words, there are many ways to fall short on your mortgage contract.

What happens if you don’t pay the mortgage

While the length of time it takes for a mortgage to be in default varies by lender and contract, the typical time frame to watch for is 30 days past due. Once your payment is more than a month late, your lender will send you a notice of default and ask you to correct the problem. If you don’t, the lender will usually send more reminders, and call, just to make sure it wasn’t an oversight.

As unpleasant as these reminders to cough up some cash might be, the biggest mistake you can make is to ignore them.

“Communication is key,” says Whitney Fite, president of Angel Oak Home Loans in Atlanta. “Reach out to the servicer early to explore your options if you know you’ll have trouble making your payment on time.”

In fact, you should ideally reach out before your payment is even due to discuss your options.

Believe it or not, mortgage lenders aren’t loan sharks who’ll break your kneecaps when they hear you can’t pay up. In fact, they may be flexible about lowering or even suspending payments for a period of time.

“If you speak to them, you can usually work something out,” Fleming says.

Speak up, and you might be able to avoid a mortgage default entirely, and this is a good thing for a number of reasons: It means you’ll remain in good standing with your lender, and it could keep your financial troubles from lowering your credit score and affecting your ability to borrow money in the future.

When mortgage default becomes foreclosure

So what happens if you stay mum and ignore those notices? After a payment is 120 days late, a default can turn into something far worse: foreclosure. That’s where a lender takes possession of a home and tries to sell it to recoup its losses.

Once a lender begins foreclosure proceedings, you’ll have to pack your bags and move out—and don’t presume you’ll have time to linger.

“It would be rare for a foreclosure to take more than six to nine months,” says Fleming.

A foreclosure stays on your credit record for seven years, which could make it harder to buy a new home down the road. And there’s more bad news: Once a property is liquidated through foreclosure and resale, the borrower could be reported to the IRS for any loss the lender incurred for lending you money.

“The IRS considers the lender’s financial loss taxable income for the borrower,” says Fite. “Many people don’t realize this until the following January, when they receive a 1099 in the mail for many thousands of dollars.”

How to avoid mortgage default and foreclosure

They key thing to remember is not to be afraid of your lender if you foresee problems in making your mortgage payments.

“Mortgage lenders don’t want to foreclose,” says Fleming. “They are not in that business. They are in the business of collecting your payments. If they foreclose, their income stream on your mortgage stops.”

That’s why they tend to be willing to work with you if you find yourself unable to make your monthly payments. The thing is, they’ll be much more understanding if you approach them, rather than waiting until they call to ask you what’s up.