Today, there are a lot of misconceptions about the foreclosure process. Many people have been conditioned to think that mortgage foreclosure is the only step taken when a loan goes bad. If you miss one payment, your mortgage goes into foreclosure, right? Wrong.
In reality, there are a few more steps in between a missed payment and a foreclosure. The two main steps are mortgage delinquency and mortgage default. How do these two loan terms differ, and what do they mean for the status of your home? More importantly, what action should you take if you’re facing mortgage delinquency or default?
What is a Mortgage Delinquency?
First, let’s define mortgage delinquency. You become delinquent on your loan as soon as you fail to pay your mortgage payment by the due date. This means even if you’re one day late, your mortgage will become delinquent.
Is this as severe as it sounds? In reality, it’s not that severe. Most lenders have a set period of time before they require a late fee. If you’re a first-time offender, it’s usually between 15 and 30 days. If you go beyond a month, you might get a mark on your credit report showing your mortgage is in delinquency.
However, even if this happens, you don’t need to worry too much. As long as you quickly get on track with your payments, the small ding on your credit report shouldn’t keep you up at night. You can easily stay in good standing as long as you don’t make a habit of late payments.
What is a Mortgage Default?
So what happens if you keep skipping payments? If you don’t get back into good standing and you miss as many as 3 or more of your home loan payments, you enter default status. This is when things start to really turn sour.
Once you hit default with your mortgage, you’ll likely begin foreclosure proceedings. Your lender will send your loan to their legal team who will begin to take action. The only way to avoid moving this process further is to get caught up completely on payments, and this includes paying any late fees or for any additional legal fees.
A mortgage default will be a much more severe hit to your credit score compared to delinquency. Even if you do get back into good standing with your lender, it will be challenging to borrow money in the future until your credit score has improved.
What Comes Next with Delinquency and Default
Both delinquency and default are loan terms used to signify the loan is no longer in good standing. While these terms are most commonly used for mortgages, they can also be applied to any type of loan including student loans. As we said above, delinquency is the least severe of the two. Your loan enters delinquency when you miss a single payment, though you don’t have any reason for alarm as long as you’re able to make your payment quickly.
However, when you continue to miss payments you’ll enter default. This is when you failed to repay your loan as stated in your the scheduled terms. Now, you’re at risk of foreclosure, and you need to take action quickly.
What should you do if you face either of these situations? Your first step is to contact your lender. They likely have repayment options for those struggling to make ends meet. Your lender wants to get their money, and they’re usually willing to work with you to avoid having to take legal action. Of course, from this point, you’ll want to stick with your payment schedule and keep up with your loan.
There is a big difference between mortgage delinquency and mortgage default. The first term is a minor infraction that can easily be rectified while the other is a warning that foreclosure is around the corner. This is why it’s essential you educate yourself on the terms of your loan, and that you stay current with your payments.