Mortgage default is a term the wide majority of borrowers and mortgage lenders never want to hear. It is when a borrower fails to make mortgage repayments for an extended period of time. This typically includes the principal mortgage balance and interest payments.
Besides mortgage repayments, there are a few less common ways a borrower can default on a mortgage. This includes: failing to pay property taxes, homeowners insurance, and transferring the property’s title to another without the lender’s permission. Other reasons may include: damaging the property and decreasing its value significantly and conducting illegal activities within the property.
Going through a mortgage default can severely impact a borrower’s credit score negatively. It also will remain on a borrower’s credit history for a period of 6 years. The lender may also require that the borrower repay the outstanding balance in its entirety as part of “accelerating the debt”. Should the borrower not repay the outstanding balance, the property’s title or ownership may be transferred to the lender. It may also increase interest rates on any other debts the borrower may have.
Usually, after a default, the property is transferred to the lender, who later resells it to cover any losses incurred.
Individuals who have experienced a default in the past may not be eligible for standard mortgage loans. Instead, they may qualify for a subprime or nonprime mortgage with higher interest rates.
Borrowers who are delinquent or close to default should contact their lender to discuss options to avoid default.