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How is a mortgage different from a consumer loan?

How To Repair CreditYou cannot equate a mortgage with a consumer loan. The latter requires a massive inflow of cash than the former. Besides, unlike consumer loans, home ownership have collateral backing, that is, your house. The collection process is also different. If you were to default, the lender will terminate the contract and repossess the home. In financial circles, experts refer to the process as a foreclosure. Other than bankruptcy, foreclosures, as well as defaults, are some of the most common contributors to the negatives in people’s credit reports.

A lender’s risk

When a lender consents to a mortgage, they put their money on the line. Usually, a lot of money. If you start being delinquent, they stand a high risk of losing the money. Unlike credit card issuers, mortgage lenders cannot tolerate repayment delays. For instance, if you are past due on your credit card for less than six months, you are still not in a severe state. You could always pay what is due, plus the late fee before shaking off the dust and carrying on.

In some cases, the lender can decide to spare you by waiving the fee. By a stroke of luck, you could also get away with non-reported delinquency. Unfortunately, a two-month delay on a mortgage repayment could spell doom to your credit-worthiness.

Avoid 90-day lateness

To avoid being on a cliff edge, avoid getting to the 90-day lateness threshold. After this duration, your mortgage service provider will require that you clear the overdue amount in one installment. Besides, if they report you to a credit bureau, the effect will be devastating. Most homeowners do not understand how lenders compute this amount of time. Unlike other lenders, mortgage providers will not call you at night or when you are at work. You may also have noticed that they sound polite over the phone and even on mail. Ignoring these messages and gestures can result in the loss of your precious home.

How they count the 90 days

After a delay of, say, one or two months, you work hard and manage to pay the installment, albeit partially. What the servicer will do is to credit your account. However, when you cross 90 days and then make payment for say one or two months in arrears, the lender can refuse to accept. They will send you back the money and play the foreclosure card. Any delay in making your first payment terminates the grace period automatically. To enjoy the benefit of a grace period, you must keep your repayment up to date.

What exactly does grace period refer to?

Usually, every loan agreement specifies a grace period which could be one, two or three weeks. During this time, you cannot afford to default. Say for instance that the agreement gives you a due date of October 1 while the grace period is for two weeks. From this assumption, you must pay your installment by October 15. After that, even if you offset one day later, the grace period privilege lapses. The consequence is that the November payment now falls due on November 1. However, if you pay on or before the first of November, you recoup May’s grace period.

Consequences of a lapse in the grace period

After the loss of your grace period, the lender starts counting your late days from the first and not the fifteenth. Let us unpack this if it sounds mixed-up.

  • You have failed to send your payment on October 15
  • Also, you did not pay as expected on November 1, or December 1
  • In effect, on December 2, you must be up to date with payments for October 1, November 1, and December 1
  • You must also pay penalties and fees

For someone who is struggling financially, you can already begin to see that this is a lot of money. Here now comes the worst part. If you are incapable of paying all these monies, the process for foreclosure could commence on December 2. Other fees you must pay include:

  • Filings
  • Title search
  • Cost of attorneys
  • Collection Fees

Once the process is on, the lender can decide to ask that you pay the remaining balance on your mortgage all at once. Only then will they stop foreclosure.

Stop the ship from sinking

If paying a mortgage has already threatened to get out of hand, you can still step up and avoid losing your home. Assess your present situation. Also, consider hiring a credit repair professional. You may not be worse off, but you still need to come up with an approach that will help you keep the home you have always desired to own. In case you have made up your mind to go through the foreclosure process, you could approach a law firm. Attorneys there will help you mitigate the loss and suggest other alternatives. Here are some options you can pursue: –

  • Pursue a repayment plan
    Mortgage servicers are always willing to discuss payment plans. With a well laid out plan, you could be back on your feet in around three or six months. You could do catch up for the late months while also making regular payments. Ensure to put everything you discuss in writing. Once you commence this plan, you will soon begin to realize the dream and improve your credit score.

Engage the services of a credit repair agency

Credit repair agencies consist of professionals who understand how the lending industry works. They can help you pinpoint items on your credit report that should not be there in the first place. By disputing and having the credit bureaus remove them, your credit score begins to improve. Another way you can get assistance is by getting the mortgage servicer to agree to a repayment plan. With such a program, you will now pay off what was delinquent over an agreed period.

Act immediately

Whenever you realize that you are struggling with mortgage payments, notify the lender. You could ask them to refer you to people that can help. Fixing your credit requires that you start taking remedial action immediately.

If you are already in serious trouble

Some problems are way too broad and may take more than three or even six months to rectify. You could opt for a loan modification or forbearance. A change alters the terms of the initial mortgage. However, some lenders report alterations in the same way as they would a debt settlement. Negotiate with your lender and ensure that they will not expose you to bad credit ratings. Forbearance, on the other hand, helps get rid of payments that you would have made at the tail end. With this option, any late settlements that you make do not damage your credit history.

The only remaining option

A time may come when you feel that your problems are too much to handle. You will be better off being in control of your credit issues than doing something silly out of desperation. Consider selling your house under a short sale agreement. Here, the mortgage lender allows you to sell the property for a price that is lower than its mortgage value. The lender will be at an advantage, and this is the opportune time to engage them in a discussion. Request that they do not report the settlement as a zero balance but instead treat it as a charge-off.

Another way is to use a pre-foreclosure sale approach where you can defer mortgage payments until after completing the sale. That way, late deposits will not appear in your credit report. Where you are unable to sell the home, a wise alternative could also be to sign over the title to the lender. After the sign-off, you then vacate. Either way, stick to the best credit repair option that will not only leave you financially relieved but also does not damage your creditworthiness.

Would bankruptcy be an ideal way out?

Unlike was the case a decade or so ago, filing for bankruptcy is no longer the easy way out. Once you are in it, you will continue to feel its effects for seven to ten years. The decision to take the bankruptcy path comes with several consequences: –

  • Low self-esteem
  • A re-defined credit report
  • Low credit score
  • Uncertainty over your eligibility for future credit
  • Inability to secure employment

You must weigh the gains and damages carefully because the effects take too long to clear. Ponder over the decision with a sober mind. Ascertain whether, by declaring bankruptcy, your financial woes will come to an end. By ridding your life of debts, you do not solve all problems; you will still have credit issues. Perhaps your main problem was not the accumulation of debt but overspending. Likewise, if you have been relying on credit to meet your daily expenses, then bankruptcy is not a good idea.

Speak to a legal expert

Also, speak to an attorney especially one that handles bankruptcies as a specialty. Do you qualify in the first place? Find out, and if you do, get to know the one as there are several chapters. Understand intensely what a bankruptcy achieves for an individual and what it does not. Consider the alternative options available such as statutes of limitation and settlements. If you file for bankruptcy without going through a lawyer, can the court be sympathetic to your cause? Some would while others will treat it as contempt. Let the attorney guide you on all these.

Keep your creditors in the loop

Before you even consider bankruptcy, alert your creditors. The credit card issuer, mortgage servicer, utility providers should be the first ones to know of your intentions. Who knows, they could consent to a payment plan. Bottom line, no lender would like to lose their money; they would rather you pay them in bits. However, even as you discuss a plan, ensure that you can afford the payments as agreed.

Keep your creditors in the loop

Before you even consider bankruptcy, alert your creditors. The credit card issuer, mortgage servicer, utility providers should be the first ones to know of your intentions. Who knows, they could consent to a payment plan. Bottom line, no lender would like to lose their money; they would rather you pay them in bits. However, even as you discuss a plan, ensure that you can afford the payments as agreed.

New life, no hassle

After successfully filing for bankruptcy, you get a new lease of life. There are no more anxious calls or visits from collectors. Penalties and fees become a thing of the past. Also, you get a chance to gain some knowledge on the credit repair process. The law requires that you undergo training on money management and use of credit facilities.

Freedom from taxes? Not yet

Filing bankruptcy does not liberate you from your obligations to the state. Child support, alimony, student loans, and fines are but examples of debts that you will continue to incur. Bankruptcy is perhaps one of the most significant negative items on a consumer’s credit report. It will remain on record for 10 years. Your credit score will take the plunge to the lowest possible scores – maybe even 20 percent.

Borrowing nightmare

On the other hand, you can hardly borrow money. Lenders will, upon querying the credit bureau, see that your scores are at the lowest category. They will then escalate interest rates making it expensive for you to obtain a loan. Others will flatly refuse to give you credit no matter the cost. Hang in there, some lenders exist that provide loans to citizens with a reputation for bad credit. Since the law restricts you from filing again for 8 years, these lenders know that you cannot run away from the debt. Plus, they have perfected the art of collecting from borrowers trying to survive through a bankruptcy phase.

Employment becomes hard to find

Bankruptcy makes your search for work difficult. Most employers carry out credit checks on prospective employees before deciding whether to hire them or not. With decreasing opportunities to earn an income, you begin to experience bouts of stress and life becomes unbearable.

In conclusion

No discussion on credit repair will be complete without addressing mortgages. A mortgage has a house as its collateral while a consumer loan depends on your credit rating. Understanding how your grace period can lapse is critical as it determines when the countdown for foreclosure begins. When servicing a mortgage becomes difficult, you can consider walking out. Credit repair professionals usually come in handy during such times. A bankruptcy declaration could be an ideal exit plan. However, you must weigh both the ups and downs carefully and decide whether you can live with the consequences.

Jay Batson
My Name is Jay has and I have a passion for financial writing. I am the chief writer on this blog. I do my best to verify all the information but if there is anything amiss please let me know and I will do my best to correct it.
Jay Batson

Author: Jay Batson

My Name is Jay has and I have a passion for financial writing. I am the chief writer on this blog. I do my best to verify all the information but if there is anything amiss please let me know and I will do my best to correct it.