Avoid Defaulting on Your Loan for Reasons Other Than Non-Payment

Non-payment isn't the only way to default on a mortgage, and the other possibilities might lead to foreclosure, as well.

Most homeowners know that if they don’t make their monthly mortgage payments, they could lose their home to a foreclosure. However, not all people realize that there are other ways to default on a mortgage, which might lead to foreclosure as well.

Read on to learn about some other types of default (other than non-payment) that could lead to the loss of your home to a foreclosure.

What Does It Mean to Default on Your Mortgage?

Defaulting on a mortgage loan means failing to keep the promises you made by signing the promissory note and mortgage contract. (Learn about the difference between a mortgage and a promissory note.)

Most notably, if you fall behind in payments, you are in default. But there are also other ways that you could default on the mortgage—other than by not making on-time monthly payments of principal and interest.

Common Non-Payment-Related Causes of Default

The most common causes of default (other than non-payment) are when a homeowner:

  • fails to pay the property taxes (when the taxes are not paid into an escrow account)
  • fails to pay the property insurance (when insurance is not escrowed), or
  • transfers ownership of the home without the lender’s permission.

Default Due to Not Paying the Property Taxes

In some cases, property taxes are paid through an escrow account set up by the mortgage lender. The borrower pays additional amounts for property taxes (on top of the principal and interest due on the loan) to the lender, as part of the monthly payment. The lender then handles paying the taxes on the homeowner's behalf when the bills come due.

When taxes are not escrowed, homeowners are supposed to pay their property taxes directly to the taxing authority themselves. Since the terms of the mortgage contract will require the homeowner to stay current on the property taxes, the homeowner is in default if he or she doesn’t pay them.

Usually, when a homeowner neglects to pay the property taxes, a lender will step in and pay them off. This is because a delinquent tax amount becomes a lien on the home, and a property tax lien has priority over even a first mortgage lender. (This means that if the taxing authority gets title to the home through a foreclosure or some other legal process due to delinquent taxes, the mortgage is eliminated.)

So, if you don’t pay the property taxes, the lender will cover the cost of the overdue taxes. But you're not off the hook: The lender will simply turn around and demand repayment of that amount from you.

Default Due to Not Paying the Property Insurance

When the lender doesn’t collect money from you to pay the property insurance (to protect the home against damage or loss by fire, for example) through escrow, you must find and pay for this insurance on your own, separate from the mortgage payments.

If you fail to obtain or maintain insurance coverage, the lender can purchase property insurance at your expense. This is called “force-placed” or “lender-placed” insurance.

The amount of the force-placed insurance is then added to your mortgage debt, which you'll have to pay. This can be expensive. (Force-placed insurance typically costs more than insurance you could purchase yourself. Learn more about this type of insurance in What Is Force-Placed Insurance?)

Default Due to Selling or Transferring the Property

Most mortgage contracts contain what’s called a due-on-sale or due-on-transfer clause. This clause states that you must get the lender’s written consent before selling or transferring all or part of the ownership of the property.

(This is different from when you sell your home and use the sale money to pay off the mortgage loan. The due-on-sale clause pertains to situations where you are selling or transferring the home, but not paying off the loan.)

If you don’t get permission before transferring or selling the home, you'll be in default and the lender can require you to pay back the entire mortgage loan, unless prohibited by law. There are a few situations when federal law permits you to transfer the property without the lender’s permission. Go here to learn about when due-on-sale clauses aren’t enforceable.

What Happens If You Default in Any of These Ways

When you don’t repay the amounts that the lender advanced for property taxes, force-placed insurance, or if you transfer ownership of the property without the lender’s prior consent, this constitutes a default under the terms of the mortgage agreement.

The lender can then demand immediate repayment of the entire mortgage debt. This is called acceleration. (In some cases, the lender must first give you notice before accelerating the mortgage debt and give you the opportunity to cure the default.)

If you don’t cure the default (in cases where you get this opportunity) or if you’re unable to repay the outstanding mortgage loan balance, the lender can foreclose on your home in the same manner as if you had fallen behind in mortgage payments. (To learn the ins and outs of the foreclosure process, and foreclosure procedures in your state, visit Nolo's Foreclosure Center.)

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