What Happens if You Can’t Pay Your Mortgage Anymore?

a sad woman in her house

Once you get to the point where you simply can’t afford your monthly mortgage payments or feel that you can’t build back your lost home equity, you might want to consider a foreclosure. Defaulting on your mortgage might be a viable option. However, you need to know that this option comes with significant consequences.

You’ll Have a Lower Credit Score

About 35% of your FICO score is for payment history. When you pay late or miss a payment, your score gets reduced by several points automatically. If you end with foreclosure, Primary Residential Mortgage, Inc. and other renowned residential mortgage lenders remind that this could remain on your credit history for as much as seven years. This could, in turn, affect your ability to secure new credit, get a loan, or even rent a house.

Your Lender Could Take You to Court

If you default on your mortgage and it still has a sizable balance, your lender could sue you. They could request the court for a deficiency judgment that would legally require you to pay the difference between your mortgage balance and the fair market value of your home.

Do note that not all states allow deficiency judgments, so check with yours to make sure. Moreover, there’s the possibility that your lender won’t take you to court and just let the Internal Revenue Service (IRS) increase your taxes significantly when it’s tax time.

You Might Have to File for Bankruptcy

While you could try negotiating some kind of settlement or payment schedule with your lender, you might still end in court and just file for bankruptcy. You would need to demonstrate to the court that you are judgment-proof, so your lender can’t garnish your wages or go after your bank account.

Defaulting on your home loan is an extremely difficult decision, particularly if you take into account the potential financial consequences. Even if you manage to avoid a deficiency judgment and walk away with a more affordable tax bill, you’ll no doubt have trouble taking out loans or buying a property in the future.