Default

To default on a loan means to intentionally or unintentionally miss several consecutive monthly payments over the course of a few weeks or months. Most borrowers learn the definition of defaulting on a loan the hard way. It’s not unusual for borrowers to postpone a payment in order to make other significant purchases. If they manage to catch up, it’s fine. However, those who suffer a sudden drop in their income and can’t make ends meet may find themselves bombarded with “past-due” letters. Most types of loans are in default when the borrower misses payments for more than 270 days in a row. Until it reaches that term, the loan is considered delinquent. 

So, a borrower can default on a loan either because he or she chooses to do so and is ready to face all the consequences or because he or she can’t afford the payments anymore for various reasons such as an imminent divorce, the death of the spouse, an illness or disability, and so on. Making any small payments toward the loan after missing a few is extremely important in order to postpone the moment the bank may foreclose on the property. Owners should even consider renting the property in an attempt to avoid foreclosure. If borrowers had not panicked during the last recession, the foreclosure rate might have been a lot lower and many would have still enjoyed the house of their dreams today. After all, lenders are aware that if the real estate market is flooded by a huge number of foreclosures and REOs, the prices will eventually drop and everybody will be losing money. 

But let’s suppose that you’ve just closed on a loan and decided that you no longer want to move in the house you purchased. Can you default on the loan in a month or so? 

How soon can you give up on your loan? 

Most lenders are open to discuss your financial context and modify the terms and conditions of the loan. If you don’t reach a consensus, you may have to wait between 120 and 180 days to refinance your mortgage. In that way, you may end up with a lower monthly payment, but also the overall cost of the loan may increase. It’s good to remember that only when you refinance you can change your mind in the next three days after committing on the loan without giving any explanation to your lender. It’s called the right of rescission. 

If you don’t repay your loan right from the beginning, you can expect to be evicted in the next 9 months, but keep in mind that during that time you are responsible for the HOA fees, maintenance fees, utility bills, homeowners insurance, as well as property taxes. Failure to stay current on all these payments may get you into bigger trouble. 

What are the consequences of defaulting on a loan?

The most significant one will reflect on your credit report. Your credit score will be chopped badly and a new loan might be harder to secure. Even if you do manage to obtain a new credit, it will come at a higher interest rate. Secondly, after the foreclosure sale, you may still owe money to your lender. You also lose the downpayment and may be responsible for other legal expenses. Defaulting on a loan may also affect your marriage and your mental health. You may even end up living with your in-laws if you can’t afford to rent after this incident. Children may also be affected by your loan default as they may have to move to a different school. All in all, defaulting on a home loan is not a good idea and should be a measure of last resort. And if you really have to get rid of a monthly payment in order to be able to pay your house, try to default on other types of loans, such as your unsecured debt: student loans, credit cards, and personal loans.