We were recently asked what a mortgage default is, so we thought it would relevant to discuss the ins- and-outs and exactly what is involved and how it impacts the borrower.
If you lend money to a borrower who offers you a first mortgage on their property, your security is a registered first mortgage. If the borrower defaults under the mortgage and does not meet the interest payments to you, the borrower is then deemed to be in default of the loan.
Mortgage default is a situation when someone is not able to pay their mortgage and as a consequence the loan will be considered “in default,” meaning the company or person who holds the mortgage can take control of that property.
When a borrower defaults on a loan they may end up losing the property, this really needs to be prevented. With a mortgage in default an individual’s credit rating can be affected and this would then make it more difficult for them to deal with financial institutions to secure credit for future loans.
Each time a home loan is settled payments are usually specified and the normal procedure is for the borrower to make monthly payments. Most mortgages consist of a payment period of 1-2 weeks, meaning payments sent through in that period would still be considered on time.
If the repayment period has elapsed any delayed payments will be levied and attract default interest which is a higher interest rate. After one month of delayed payments, the mortgage maybe considered to be in default. The lender may then send a notice for a mortgage default to credit originations which again will impact on the credit score of the individual.
In just 30-90 days of the determination the mortgage is in default, the lender will send notice of a mortgage default to that borrower. This happens to be the first step within foreclosure. After the notice has been served on the borrower, depending on the type of property and the state the monies have been lent in, the lender can obtain “possession” of the property.
Once the lender has possession of the property, the usual requirement is to engage a real estate agent to auction the property using a 3-5 week auction campaign. Once the property sells at auction the debt is repaid to the lender, with all associated costs i.e. legal fees, real estate fees, default interest etc.
In summary if you lend monies, your funds are fully secured by way of a first mortgage. If the borrower defaults on the loan and does not meet the interest payments, they are deemed to be in default but your funds are still fully secured by the mortgage on the property.
Disclaimer: This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and seek specialist advice from a qualified and licensed advisor.