What happens if I fail to pay the mortgage for my property

Question

What happens if I have a bank loan and fail to pay the mortgage? Will the bank take the property away from me? Is this why it is always better to get a downpayment even though I have enough cash to purchase the entire property by cash? Thanks!

Greg M. · Answer

For clarification, the bank may be able to go after you for the deficient balance. The ability of the bank to do this varies from state to state. There are 12 non-recourse states, Alaska, Arizona, California, Connecticut, Hawaii Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington, where the bank cannot go after you for the deficiency. The other 38 states they can and will go after you for the deficiency.

Patricia Steiner · Answer

And, the bank can pursue you for any deficiency balance resulting after the foreclosure sale.  Even if you really, really want the property to go away, you really, really don't want to do it this way.

William Hochstedler · Answer

@Samuel Chua

Recourse just means that lenders can go after the borrower above and beyond the amount of the liquidated collateral of the property.  For example, a borrower might owe $125K on a property that was foreclosed and liquidated for $100k.  This leaves a deficiency of $25K.  Because a borrower personally guarantees most loans, the bank can pursue the borrower independently.  If the lender does not have recourse against the borrower, they cannot attempt to collect the deficiency.

@Greg M. mentioned states that protect borrowers against recourse.  Other states have homestead laws that protect a certain amount of equity an owner has in their property.

You also see non-recourse loans where lenders only available recourse on default is what they can get from the property.  This is important when the borrower is purchasing with a retirement account (which prohibits recourse) or a foreign borrower where a lender would have trouble collecting.

Colleen F. · Answer

Yes, if you don't pay your mortgage in the US  eventually the bank will take the house ( foreclosure).  most people get a loan so the money is not tied up in the house where it is hard to reach in an emergency.  Also if you are buying a rental your mortgage interest is an expense that is deducted from the income you recieve.

Kyle J. · Answer

Eventually the bank will foreclose and you'll lose the house if you don't pay the mortgage.

Scott Marshall · Answer

The process of foreclosure varies from state to state.  Generally speaking approximately 3 months from your last payment 90+ days past due you will receive a Notice of Default which is the formal notification that you have not fulfilled the contract you had with the lender (mortgage).  This Notice will detail the defaults and will let you know what needs to be done to cure those defaults.  If you do not cure the defaults the property will move to foreclosure either judicially or non-judicially as determined by the lender.  The process is not fast or painless.

Yes, this is why you get a better rate from the lender for putting down a larger down payment.  The down payment is your "skin in the game" and lower's the risk to the lender that you will just walk away from the property if things get tough.  Banks and financial institutions do NOT want to own the property, that's not their purpose and it is expensive for them to do so.  That is beside the costs for the foreclosure and the holding costs they incur as well as the opportunity cost that happens as they have higher reserve requirements for REO properties rather than loans.

Scott

Jennifer T. · Answer

If you're talking about in the U.S., yes, a bank will eventually foreclose  on a property if the mortgage isn't paid and take it away from whomever the owner is.  Though it can take many months of missed payments before a bank starts the foreclosure process.

I've actually purchased two properties that were bank foreclosures.

One of them was an investment property for the previous owner and there were tenants living there when it was foreclosed on.  According to the neighbors, the previous tenants got quite a few months of free rent until the bank put their own locks on the door.  None of the tenants were home when that happened, so windows were broken in order for them to get their stuff out.

Personally, I think it's usually better to keep a good emergency fund for potential lean times rather than buying a house cash.  That can be a lot of money tied up in a non-liquid asset.  And, just because there isn't a mortgage, doesn't mean you don't have to at least pay property taxes and should pay insurance.  Because cities will take the property also if the taxes aren't paid.  Though usually that's also a long process with many chances to get the property back before it's sold at auction.

Caveat: this is really general info for processes that are very detailed and can vary a lot by bank or city/county.

Samuel Chua · Answer

sorry, could you define recourse? Thanks!

William Hochstedler · Answer

In Utah non-recourse only applies to primary residences.  I don't know about other states, but be careful if this is an investment property.  You may not be protected by the non-recourse laws.

Ryan Naylor · Answer

Oh my goodness....

Why is this a "bad property"? Whats the situation, that might be a better way of determining your best course of action.

Nevermind. just read the last post....

What happens if I fail to pay the mortgage for my property

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