Mortgage Liability
By Robert Rafii, Esq. | Legally reviewed by FindLaw Staff | Last reviewed April 09, 2024
This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw’s team of legal writers and attorneys and in accordance with our editorial standards.
The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area.
A mortgage is a type of debt that must be repaid within a certain period. First-time home buyers often take out mortgages for real estate purchases. When buying a home, a person looking to take out a new loan should first determine whether a mortgage payment can fit within their existing budget.
Many foreclosures, as well as the market crash of 2008, were in part caused by people taking mortgages they could never afford. These were often pushed by predatory lenders. To avoid foreclosure, it is very important to educate yourself on the legal implications of taking on a home loan before you begin mortgage shopping.
This section includes articles addressing mortgage loan liability matters and what to do if you are behind on your payments.
What To Do When You're Behind on Your Mortgage
Most people will experience periods of financial difficulty at least once in their lives. This can make it very difficult to pay your mortgage in full and on time. A late mortgage payment or a missed mortgage payment could certainly upset your mortgage lender. Keep in mind that mortgage companies are not always motivated to initiate the foreclosure process.
Instead of going through foreclosure proceedings, most lenders would rather work with you if they know you're also making a good-faith effort to pay what is owed.
If you can’t pay by the first of the month, try buying some time. Contact your mortgage servicer as soon as you suspect you may not be able to make your payment on time or in full. The longer you wait, the fewer options you will have.
If you have fallen behind on your payments, talk to your loan servicer about the following options:
- Reinstatement: The borrower pays the past due amount and any applicable late fees by a certain due date. This makes the most sense for temporary financial hardships.
- Repayment plan: Similar to reinstatement, but a portion of the past due amount is added to the regular monthly payment until the borrower is current with payments.
- Forbearance: Mortgage payments are either suspended or reduced for an agreed-to grace period. When this period has ended, the borrower resumes regular payments in addition to the past-due amount. This may be either in a lump sum or installments. Forbearance is not a good option if your financial setback is permanent.
- Loan Modification: Short of selling your home or slipping into default, mortgage modification is the best option for borrowers whose incomes have fallen indefinitely. This involves a renegotiation of one or more loan terms.
- Refinance: You may be able to lower your interest rate by refinancing. If your credit history and payment history are fairly good before you fall behind, a bank might be willing to help you refinance.
- Sale: Sometimes selling your home is the only option. This can be done through a short sale.
- Deed-in-lieu of foreclosure: Instead of forcing a foreclosure sale, your lender might agree to take the deed to your home. Your FICO credit score might take a smaller hit than if foreclosure proceedings began.
- Bankruptcy: This is the most extreme option and can blemish your credit report for 10 years, but offers a fresh start for those who cannot repay their debts. After declaring bankruptcy, the credit bureaus will make it more difficult for you to borrow money, even on credit cards.
The Department of Housing and Urban Development (HUD) offers helpful resources for the options listed above. Speak with a housing counselor for more information.
Mortgage Insurance
One way to protect yourself against a possible default is to purchase private mortgage insurance. This may be required by some lenders if your down payment is less than 15%-20%.
The insurance payment is added to your monthly mortgage payments, but it may be canceled if you accumulate a certain amount of equity in the home. This amount is usually 20%-25%.
You also may be able to cancel your mortgage insurance policy if your home's value has gained a significant increase through a remodel or local property increases.
If you purchased your home after July 29, 1999 (under the Homeowners Protection Act) you may cancel your private mortgage insurance by considering the following options:
- Talk to your lender by asking in writing
- Have your home appraised by a professional
- Determine your loan-to-value ratio, which lenders want below 80%
- Compare your loan-to-value ratio
Mortgage Liens
Lenders hold the mortgage as security against default. If the borrower is unable to repay the loan, then the lender can foreclose on the property and sell it.
Depending on your state, the lender either holds the actual title to the property or holds a mortgage lien over the property. In the latter scenario, a mortgage lien will appear on the title and prevent a borrower from selling the property before repaying the loan.
It makes sense to get a solid understanding of mortgage liability before buying a home. Click on a link below to learn more.