A mortgage is a type of debt that must be repaid within a certain time period, typically for real estate purchases. In the context of buying a home, a person looking to maintain a mortgage should first determine whether a mortgage payment can fit within their existing budget. Many foreclosures, as well as the market crash of 2008, were in part caused by people taking mortgages they could never afford (often pushed by predatory lenders). To avoid foreclosure, it is very important to educate yourself on the legal implications of taking on a mortgage before you begin mortgage shopping. This section includes articles addressing mortgage liability matters and what to do if you are behind on your payments.
What to Do When You're Behind on Your Mortgage
Most people will experience periods of financial difficulty at least once in their lives, which can make it very difficult to pay your mortgage in full and on time. But keep in mind that lenders are not motivated to foreclose on your loan as long as they know you're also making good faith efforts to pay repay what is owed. Therefore, you should contact your lender as soon you suspect you may not be able to make your payment on time or in full; the longer you wait, the fewer options you will have.
If you have fallen behind on your payments, talk to your lender about the following options:
- Reinstatement - Borrower pays the past due amount (and any applicable late fees) by a certain date; this makes the most sense for temporary financial setbacks
- Repayment - Similar to reinstatement, but a portion of the past due amount is added to the regular monthly payment until borrower is current with payments
- Forebearance - Mortgage payments are either suspended or reduced for an agreed-to period of time; when this period has ended, borrower resumes regular payments in addition to the past due amount (either in a lump sum or installments); not a good option if your financial setback is permanent
- Loan Modification - Short of selling your home or slipping into default, this is the best option for borrowers whose incomes have fallen indefinitely; this involves a renegotiation of one or more loan terms
- Sale - Sometimes selling your home is the only option
- Bankruptcy - This is the most extreme option and can blemish your credit report for 10 years, but offers a fresh start for those who cannot repay their debts
One way to protect yourself against a possible default is to purchase private mortgage insurance, which is required by some lenders if your down payment is less than 15 or 20 percent. This amount is added on to your monthly mortgage payments, but may be cancelled if you accumulate a certain amount of equity in the home (typically 20 to 25 percent). You also may be able to cancel your mortgage insurance policy if your home's value has significantly increased through a remodel or local property increases.
If you purchased your home after July 29, 1999 (under the Homeowners Protection Act) you may cancel your private mortgage insurance by considering the following options:
- Talk to your lender by asking in writing
- Have your home professionally appraised
- Determine your loan to value ratio (typically, lenders want it to be below 80 percent)
- Compare your loan to value ratio
Lenders hold the mortgage as security against default; if the borrower is unable repay the loan, then the lender can foreclose on the property and sell it in order to repay the loan. Depending on your state, the lender either holds the actual title to the property or holds a mortgage lien over the property. In the latter scenario, a mortgage lien will appear on the title and prevent a borrower from selling the property prior to repaying the loan.
It makes sense to get a solid understanding of mortgage liability prior to buying a home. Click on a link below to learn more.