Mortgage delinquency is a term that indicates that the borrower is at least 30 days behind schedule on making at least one payment on their home loan. Missed and late payments on a mortgage can affect a borrower’s credit score and result in foreclosure.
If you’re a mortgage holder and you don’t make your payments on time, your mortgage becomes delinquent. This can have serious consequences for your finances, so it’s important to stay on top of things. As a real estate professional, it’s my job to help you understand this and other key terms in the industry. So don’t sweat it – with a little knowledge and hard work, you can crush it in the world of real estate.
Let’s dive in and learn how to define delinquent mortgages and differentiate them from other terms.
What Is a Delinquent Mortgage?
A delinquent mortgage is a mortgage in which the borrower has missed payments as required by the mortgage contract.
After a certain point in delinquency, mostly 30 to 60 days, the mortgage lender may begin foreclosure proceedings. This means that if the borrower doesn’t make up for the missed payments, the lender can take possession of the borrower’s home.
Delinquency of a mortgage starts when the borrower doesn’t make the periodic payment on the first due date. The mortgage remains delinquent until the borrower repays the amount of missed payments. Mostly, delinquency occurs when the borrower loses a job or faces a financial crisis, due to which they can’t make payments on time.
A 90-day delinquency rate indicates serious delinquency. It means that the borrower has failed to pay three or more mortgage payments. A default occurs if the borrower fails to make payments on a delinquent mortgage. Afterward, the lender sends a notice of default to the borrower.
A notice of default means that the lender can begin the process of foreclosure. In this case, if the borrower doesn’t cure the default, the lender has the right to foreclose the property.
How Does Mortgage Delinquency Work?
When borrowers take a mortgage, they must make monthly payments to the lender. These monthly payments include interest and principal amounts. There are deadlines set by the lender and agreed upon by the borrower; according to the agreement, the borrower has to make a payment every month on or before the deadlines. The mortgage becomes delinquent if the borrower fails to pay on the deadline.
At this point, when a mortgage becomes delinquent, the lender charges a late fee. However, the mortgage is still considered delinquent if the lender doesn’t charge a late fee. After every missed payment, the lender charges a late fee. In most states, mortgage lenders must wait if the loan payments are more than 90 or 120 days overdue.
During this period of mortgage delinquency, the borrower and lender work together to solve the issue. A foreclosure process is mostly the last option because it is a lengthy and costly procedure. If the borrower’s financial hardship is temporary, the lender and the borrower make a forbearance agreement. With this agreement, the lender allows the borrower to make small monthly payments or temporarily stop making payments for a while.
What Happens When a Mortgage is Delinquent?
When a mortgage is delinquent, it can lead to several consequences. For instance, it can damage the borrower’s credit score, cause late fees, and create difficulties in getting a new mortgage. Moreover, if the delinquency isn’t solved, the borrower can also lose their home. Let’s explore what happens when a mortgage is delinquent:
Impact on Credit Score
If the borrower has a mortgage delinquency (missed payments) of more than 30 days, it can damage the credit score. The longer a mortgage is delinquent, the more damage it causes to the credit score. This happens because the mortgage servicer reports the borrower’s activities to the major credit bureaus. A low credit score makes it difficult for the borrower to perform other financial activities.
A delinquent mortgage can result in late fees. The late fees can be between 3% and 6% of the monthly mortgage payment and added every month as long as the mortgage is delinquent. The promissory note and mortgage agreement include details of late fees that the borrower might face in case of a delinquent mortgage.
Difficulty Buying a Home or Refinancing
Mortgage delinquency can affect the credit score, affecting the borrower’s ability to buy a new home or refinance the mortgage. If the borrower wants a new loan, the lender will pull the borrower’s credit report to see their creditworthiness. A low credit score can make it difficult to obtain loans and mortgages. Even if the borrower gets a loan, they will have to pay higher interest rates.
Foreclosure is the most serious consequence a borrower can face due to mortgage delinquency. If borrowers have missed many mortgage payments, they default on the mortgage. When the borrower defaults on the payments the lender can start the process of foreclosure.
However, the lender first sends a notice of default to the borrower, which indicates the lender’s right to foreclosure. If the borrower makes the remaining payments, the lender stops foreclosure proceedings. On the other hand, if the borrower doesn’t pay the missed mortgage amount, the lender can foreclose the property. Foreclosure is a legal process in which the lender can take ownership of the property and sell it to cover their loss.
Delinquency vs. Default
Delinquency and default are real estate terms that represent different levels of the same problem: missed mortgage payments. Mortgage delinquency means the borrower has not paid the monthly mortgage payment on the due date. On the other hand, a mortgage default means that the borrower has passed the period of mortgage delinquency. This means the borrower has failed to make mortgage payments for more than 90 or 120 days.
Mortgage delinquency and default occur due to missed payments, but the default is a more serious consequence. It must be remembered that mortgage delinquency periods can differ depending on the lender or the state requirements.
For instance, a missed mortgage payment of more than 30 days is delinquent for one lender, while for another, it might be a missed payment of more than 90 days. On the contrary, a mortgage default is a situation that allows the lender to foreclose on the property.
Delinquent Mortgage Example
Tom wants to purchase a home for $200,000. He paid $20,000 as a down payment and took a mortgage for the rest of the amount. A bank approved his mortgage and funded him with $180,000. The following is a breakdown of the mortgage:
- Mortgage balance: $180,000
- Interest rate: 4.75%
- Term: 20 years
- Monthly payments: $1,163
- Payment due: Every 30th of the month
Tom is required to pay $1,163 every month to the lender. He regularly pays for five years, and then misses his first mortgage payment. Tom failed to pay $1,163 on the 30th of September. At this point, the lender applied a late fee of 4% of the monthly mortgage payment. Late fees are calculated as follows:
- Late fee: monthly mortgage payment X rate = $1,163 X 4% = $46.52
Tom is now 30 days late on his first payment, and after the 30th of October, he misses the second mortgage payment. After the second missed payment, another late fee is applied, and the total late fee is $46.52 + $46.52 = $93.04.
After two missed payments, Tom paid two monthly payments and a late fee of $93.04. He pays this amount on the 2nd of November:
- Two missed mortgage payments + Late fees = $1,163 + $1,163 + $93.04
- Total delinquent payments = $2,419.04
Frequently Asked Questions
How To Fix a Delinquent Mortgage?
If the borrower falls behind their mortgage payment, there are certain steps they can take to fix the delinquency. The following are the steps the borrower must take to solve a delinquent mortgage:
• Communicate with the mortgage lender
• Establish a repayment plan with the lender
• Renegotiate the loan and ask for a mortgage modification
• Seek forbearance
• Sell the property
What Does it Mean When Your Loan Is Delinquent?
When a loan is delinquent, the borrower is behind the monthly payment schedule. A delinquent loan allows the lender to charge a fee, which is called a late fee. When a borrower misses one mortgage payment, the lender applies a late fee for the first time. Another late fee is charged when the borrower misses the second mortgage payment, and so on.
What Is the Difference Between Delinquent and Default?
Delinquent and default are two terms indicating that the borrower is late on making a monthly mortgage payment. Delinquency is when the borrower has missed the first mortgage payment, and default occurs when the borrower has missed more than one payment. There is a period until the loan is delinquent, for instance, 30, 60, or 90 days, after which it is considered a loan default.
How to Avoid Mortgage Delinquency?
To avoid mortgage delinquency, the borrower must make payments on time. If borrowers forget to make payments on time, they can avoid this by setting up an automatic payment plan.
With an automatic payment system, the lender receives payment from the borrower’s bank account every month on the specified date. If the borrower doesn’t have enough money to make timely monthly payments, they must ask their loan provider for a loan modification.
Can You Refinance a Delinquent Mortgage?
In some cases, refinancing a delinquent mortgage is possible. However, it must be remembered that missed payments on the current mortgage can lower the borrower’s credit score.
In this case, a new lender won’t approve the loan; even if they approve it, they will offer higher interest rates. Thus, it is not a good option for the borrower as higher interest rates means higher monthly payments.
What to Know for the Real Estate Exam
A delinquent mortgage is when the borrower fails to make the first payment on the due date. Mortgage delinquency occurs when the borrower is at least 30 days late on the mortgage payment. A mortgage can be delinquent for a maximum of 120 days, after which it is considered a default.
Mortgage delinquency can impact the borrower’s credit score, and if it isn’t solved, it may result in foreclosure. The lender can foreclose the borrower’s home, which is a lengthy and step-by-step procedure. During this process, the borrower is given several chances to repay the missed payments and stop foreclosure.
Now that you understand delinquent mortgages, you can easily define it on your real estate exam. If you want to learn more about such real estate terms, visit the extensive collection of real estate vocabulary.