Details

Created on Wednesday, 22 February 2012 15:46

Mortgage Default: We Will Take the Home, the Car and Part of Your Income

For the many homeowners who have lost their homes through foreclosure, the attitude of mortgage lenders towards delinquent homeowners has not been very impressive at all.

Most times, as soon as a homeowner becomes delinquent on his or her home loan, the mortgage lenders who were initially very polite and kind with the person at the initial stage of the mortgage process suddenly turn to vicious entities whose only target is to get back what is due them.

In such cases, the mortgage lenders chase after every single property of the homeowner that can be of value to them.

The most common practice is for the mortgage lender to take over the home for which the mortgage was acquired. There are times that the borrower would have had a lot of late mortgage payments which have accrued interest and fees making the total debt of the borrower more than what the home can fetch when sold on the market.

This situation is even compounded by the fact that the housing market is struggling with devaluation. Due to devaluation, majority of distressed homeowners in the US owe more on their home loans than what their homes are actually worth. These groups of distress homeowners are known as underwater homeowners.

Underwater homeowners are especially the ones who end up suffering at the hands of their mortgage providers when they become riddled with debt and cannot pay their mortgage.

Homeowners facing mortgage default can turn to other alternatives to foreclosure such as short sale or deed in lieu of foreclosure. But even with these options, it is totally within the right of the lender to decide whether to chase after the homeowner for any unpaid amount.

While mortgage default is something that is never on the mind of any borrower or potential homeowner, it does happen and so borrowers should critically examine the mortgage agreement presented to them by the mortgage lender and in cases where there is anything that is beyond the understanding of the homeowner, they can seek clarification on such matter.

In the mortgage industry, two terms exists which clearly states how the mortgage lender may attempt to recover any unsettled amounts on the mortgage. These terms are Recourse and Non-recourse Mortgages.

Most lenders will require that you present them with collateral which is supposed to be something of value so that when you fail to pay back the loan, the collateral can be sold and the amount generated from the sale used to pay back the loan.

For mortgage loans, the collateral is more often than not the home that was purchased by the homeowner. If the collateral is worth more than the unpaid loan, the lender will have to sell the property at the current market value, take what is due them and return the balance to the delinquent borrower.

However, if the collateral is worth less than the debt, then the lender can decide to seize the borrower’s car, land, savings or any other property to make up for the difference.

The lender can only do this if the loan agreement makes it possible. In this instance, we say that the mortgage is a Recourse Mortgage.

Nevertheless, for a Non-recourse Mortgage, the lender cannot touch any property of the borrower that is not listed as collateral on the loan. So, if the collateral on the mortgage is the home of the borrower and nothing more then it means that the lender can only seize the home in its quest to recoup its investment in the home loan.

For this reason, mortgage lenders are not so willing to give out non-recourse mortgages to homeowners but it is possible to obtain this type of loan. All the borrower needs to do is to find out where and who offers such loans and then apply for it.