A guide to mortgage debt collection

Stewart Dunlop

July 11, 2019

Stewart Dunlop (pictured) is a content manager working with LegalZoom

It’s not a position anyone wants to be in: struggling to pay the mortgage. Perhaps an unexpected expense came up, or you lost your job. You simply can’t make the payment one month and you slip into arrears.

Your mortgage debt is secured on your home, so if you can’t pay, your creditor (likely a large bank) could sell your home to recoup their money.

Keep in mind, though, that from their point of view, it’s better if you pay back your loan instead… so they’ll want to work with you if possible to avoid having to foreclose on your property.

Avoiding mortgage arrears

As soon as it looks like you’re going to be facing trouble, you want to act. Don’t put your head in the sand and hope that things will miraculously turn around.

If it’s becoming a struggle to pay your mortgage, then one simple step you can take is to look for a better deal – you may find that you could switch to a different mortgage at a much better rate.

Even a single missed payment, that you quickly catch up on, can be an issue as it can stay on your credit report – potentially making it tougher to get credit in the future.

How soon will creditors move to foreclose?

In the USA, since 2014, mortgage providers have been required to give you 45 days’ written notice before foreclosing. They should offer you options such as a short sale or a loan modification.

And in the UK the major lenders won’t begin repossession proceedings until you’ve been in arrears for at least three months.

Generally, your mortgage provider should work with you to agree on some sort of alternative payment plan. In fact, in the UK, your bank shouldn’t start repossession proceedings if you’re actively negotiating a settlement with them.

You could see this as a form of debt settlement agreement, where you’re agreeing to new terms that’ll allow you to catch up on your mortgage.

Options you can ask for will normally include:

  • Extending the mortgage term. If you have a 20-year mortgage, you might be able to extend this to 25 years – reducing the amount that needs repaying each month. (Keep in mind that this will mean paying more interest in the long run.)
  • Taking a payment holiday. Your bank might allow you to “pause” mortgage payments for a few months so you can catch up and get back on track. This could be a good option if, for instance, you’re going to be starting a new job soon.
  • Switching to an interest-only mortgage temporarily. Instead of paying off the loan itself, you could simply pay the interest on the loan (this will make a bigger difference if you’re near the end of the mortgage).

If you still can’t pay your mortgage, you will lose your home

While you won’t get kicked out of your home the day after you miss your first mortgage payment, if you aren’t able to pay your mortgage (and you can’t come to a new loan agreement with your bank), then – inevitably – you’ll end up losing your home.

The bad news doesn’t stop there, though, because …

a) You may still owe money

If your bank sells your home, they’ll normally want to so quickly – which often means selling at auction and not receiving the full market value.

This means you could still owe money (if the sale cost doesn’t cover what you owe), and you might still have to pay this back.


b) You may not be able to get a mortgage in the future

If your home is repossessed, that can make it much harder to get a mortgage in the future (as lenders will, understandably, have concerns about your ability to pay back the mortgage).

This means that if you do face being unable to pay your mortgage, it’s usually best to sell your house yourself and pay back the mortgage. You’ll hopefully be able to cover the full amount of what you owe that way.

The most important thing to keep in mind is to be proactive about any mortgage difficulties. Talk to your lender as soon as it looks like you’re going to be struggling to make payments: it’s in their interests to help you out.

You’ll also want to look into sources of government help, too, as you may well be eligible for support such as SMI (Support for Mortgage Interest).

It’s crucial that you don’t ignore letters from your creditor – as they may then move to repossess your home more quickly.

If it does look like you’re inevitably going to end up losing your home, you’ll be in a much better position if you can put it on the market and sell it yourself, rather than waiting for your creditor to swoop in and foreclose. Keep in mind that this might take a while – an average of 162 days – so you’ll want to start the process promptly. You can always take your house off the market again if your financial situation improves.

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