Avoid defaulting on your mortgage

Mortgages and other types of home loans impose specific duties on borrowers, who are obligated not only to make payments, but also to comply with other requirements. Failure to do so constitutes a "default" on the loan, which can lead to foreclosure, among other adverse consequences.

The requirements of a loan are spelled out in the deed of trust or other loan documents and can vary from one loan to the next, depending on the type of loan, state laws and lender policies, among other factors.

Here are some situations that might trigger a default:

Late payment. Most lenders allow a 15-day "grace period," during which the borrower can make a payment after the due date without discernible consequences. The grace period doesn’t alter the due date, however, so a late payment during that period technically could be considered a default on the loan.

Typically, a late-payment penalty would be assessed at the end of the grace period, and a late payment would be reported to the credit bureaus after 30 calendar days or the last business day of the month. Some lenders start up their collection machinery of letters and telephone calls much sooner, however, especially if the borrower has a subprime mortgage or a history of late payments.

Change of ownership. Borrowers typically are required to notify the lender if the ownership of the property changes. The most obvious instance would be the sale of the property, but the owner’s death, a divorce settlement, or a gift of the property to a parent, sibling or child are also among the situations that could trigger this requirement.

Unpaid property taxes. Payment of property taxes and other assessments, either directly or from a set-aside escrow account managed by the lender, is another typical requirement. Lenders insist on payment of taxes because if the property were sold, the government typically could collect the unpaid taxes from the proceeds of the sale before the lender received the loan payoff. Lenders don’t like to get in line behind government agencies.

Unpaid insurance premiums. Borrowers typically are required to purchase homeowner’s insurance to protect against loss in the event of a fire, theft or other specified risks to the property. If the property is located in a flood-prone area, flood insurance may be required as well.

If the borrower doesn’t pay the premiums, again either directly or through an escrow account, the lender can "force place" insurance on the property at the borrower’s expense. Force-placed insurance is typically much more expensive than insurance homeowners can purchase themselves.

Late payments, unpaid property taxes and lack of proper insurance can all constitute a default. The best protection against an inadvertent default is to read the loan documents and call the lender or loan servicing company if any unusual situations occur.

If you have missed mortgage payments due to a financial hardship and are worried about foreclosure, learn about some alternatives to foreclosure in the following article: http://www.lendingtree.com/smartborrower/Mortgages/Alternatives-to-foreclosure.aspx.


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