What Happens When You Default on a Home Loan?
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Cause and Effect
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If you had an ailment that needed medical attention and you immediately sought treatment, chances are, the injury would repair itself fairly quickly. However, if you failed to seek medical treatment, the same ailment will inevitably turn into something much worse. A homeowner will garner similar results if he continues to default on his home loan payments. An occasional late payment is expected, and sometimes, beyond the homeowner's control. But when late payments evolve into missed payment--and then into prolonged missed payments, the homeowner will suffer the consequences of his actions.
Line of Communication
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When you default on a home loan, basically, it means you neglected your financial responsibility. However, there are numerous reasons as to why a homeowner may not be able to pay her mortgage. Sudden job loss, medical emergencies and adjustable rates are common reasons. Whatever the reason, it is best to communicate your financial hardship to your lender---immediately. Reason being, if your hardship is temporary, most lenders are willing to work with you to get you back in the black.
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Collection Process
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Most home loans are due on the first day of each month. Home loan agreements have an allotted grace period time of 10 to 15 days, most being the latter. If your home loan payment is not received during that time, a lender will add a late fee to your normal mortgage payment. If your home loan payment is not received after 30 days, a borrower is considered in default. At this time, the lender will reach out to the borrower to try and determine the problem. In addition, when a home loan payment has not been received by the 30th of each month, the lender will report the late payment to the three major credit reporting agencies. If two home loan payment are missed, the borrower will begin receiving phone calls and letters from the lender's collection department. However, there are certain collection guidelines that must be followed. (See Resources.)
Dire Situation
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After missing three consecutive home loan payments, a borrower has definitely reached a dire situation. A "notice of default" will be sent to the homeowner explaining what is owed, in addition, the lender will explain his next step if the home loan remains unpaid. Usually, lenders will begin foreclosure proceedings at this stage. However, this procedure will vary from state to state. (To check specific states see Resources.)
Avoiding Foreclosure
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The best way to prevent foreclosure is to notify your lender at the first sign of financial trouble. It may be embarrassing to admit you cannot meet your financial obligation, but it cannot compare to the embarrassment of losing a home. Your lender is in the business to loan money--not to take homes. There are quite a few alternatives to foreclosure, but each situation is different. A homeowner may be able to change the terms of his loan, spread out his missed payments, apply for forbearance or arrange a short-sale. (See Resources)
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