If you have missed your home loan EMI payments or not paid your property taxes yet, these dues can accumulate over the time, making you fall under the category of delinquency. Delinquency comes in various types, and there are many ways to avoid it. So, read on to learn all about delinquency in real estate, its types, and ways to prevent it.
See also: Can banks auction property if borrower defaults on loan EMIs?
What is delinquent?
In the world of finance, an individual, company or another institution is considered delinquent when they fail to meet their financial obligations within the agreed-upon time. These financial obligations can take various forms, such as delayed payment of Equated Monthly Instalments (EMI) on loans, bond payments, credit card payments, or any other payment where the borrower has not fulfilled the required payments to satisfy the debt(s). Delinquent entities can include both individuals and corporations. Financial delinquency often leads to default if the overdue payments are not brought up to date.
Delinquency in real estate: Types
Delinquency in real estate is the failure to pay back your property-related debt within agreed-upon time. Primarily, there are two kinds of delinquency in real estate. These include:
Mortgage delinquency
Mortgage delinquency refers to the failure of a borrower to make timely payments on his/her mortgage, typically missing one or more consecutive monthly payments. It indicates financial distress and can lead to more severe consequences, including foreclosure. Lenders often cooperate with delinquent borrowers to find solutions, such as loan modifications, to avoid foreclosure and help them bring their payments up to date.
Tax delinquency
Tax delinquency happens when property owners do not pay the property taxes within the specified timeframe. This non-payment can lead to financial penalties, interest accrual and potential legal actions by local authorities. Delinquent property taxes can result in adverse consequences, including tax liens or foreclosure. Resolving property tax delinquency typically involves settling the outstanding dues, and some jurisdictions offer payment plans, rebates, or assistance programs to help property owners catch up on overdue payments.
Consequences of delinquency
The repercussions for delinquency depend on the account, creditor, and contract, with repeated delinquencies leading to default. Factors like type, cause and duration influence the consequences. For instance, a late credit card payment may incur a fee, while mortgage delinquencies could trigger foreclosure proceedings. Delinquencies also impact credit ratings, constituting 35% of the total score. While a few delinquent payments may have a limited impact, consistent lateness or non-payment can significantly harm your credit score.
Solution for delinquency
Mortgage default can result in late fees and damage to one’s credit score. Here are several options to address the situation:
- Modify the loan: A servicer may offer to modify mortgage terms for borrowers facing late payments. Modifications may involve changes to the principal amount owed, loan term or interest rate. Borrowers with adjustable-rate mortgages (ARMs) might be offered a fixed-rate mortgage to prevent further consequences.
- Agree to forbearance: Forbearance allows borrowers to temporarily pause payments on their home mortgage. It is suitable for those experiencing short-term hardships, such as job loss or disability. Any missed payments during forbearance will need to be repaid at a mutually agreed-upon time between the borrower and the lender.
- List the home as a short sale: A short sale occurs when a delinquent borrower is approved to sell their home for less than the outstanding mortgage amount. Proceeds from the sale go to the lender, who may forgive any remaining amounts or obtain a deficiency judgment. Some states may require borrowers to pay any differences owed by default.
- Foreclosure: Foreclosure is a legal process where a lender attempts to recover outstanding loan balances by forcing the sale of the collateral property. It is a serious consequence for prolonged mortgage delinquency, sought under extreme circumstances such as non-payment or consistent failure to adhere to loan terms for an extended period. Lenders generally seek to avoid foreclosure due to the associated time and expenses.
Each of these solutions addresses mortgage delinquency in different ways, providing options for borrowers based on their specific financial circumstances.
Difference between delinquency and default
Delinquency arises when a borrower misses a loan payment, potentially leading to default. Default occurs when the borrower fails to repay the debt according to the initial contract. Creditors often allow a grace period for delinquency before declaring default, with the duration varying by lender and debt type. Lenders may collaborate with borrowers to resolve delinquent or defaulted accounts, offering a chance to bring the account up to date. However, persistent delinquency and defaults negatively impact credit scores. If unable to arrange payments, creditors may escalate actions, including third-party collections, legal proceedings, and asset liquidation for secured debts, potentially leaving the borrower liable for any remaining balance or additional fees.
How to avoid delinquency?
Real estate delinquency occurs when a borrower is unable to make timely payments on his/her mortgage or loan, impacting both the borrower and the lender. To prevent delinquency and ensure a smooth real estate transaction, consider the following steps:
- Make a budget: Before purchasing property, establish a realistic budget covering all expenses, including mortgage payments, property taxes and maintenance costs. This ensures financial stability and avoids strain.
- Keep an eye on your credit score: A good credit score is crucial for favourable financing terms. Pay bills on time, keep credit card balances low, and avoid excessive debt. Keep an eye out for any errors on your credit reports.
- Pick the loan carefully: Select a financing option that suits your financial situation by comparing interest rates, loan terms, and repayment options. Find the most affordable and suitable option for your needs.
- Perform property inspections: Before purchase, conduct comprehensive property inspections to identify potential issues or repairs. This helps avoid unexpected expenses and ensures the property’s condition.
- Make bigger down payments: Save for a down payment to reduce the loan amount and lower monthly mortgage payments. Aim for at least a 20% down payment to avoid additional costs like private mortgage insurance.
- Have an emergency fund: Create an emergency fund as a financial safety net for unexpected expenses or income loss. Save three to six months’ worth of living expenses to mitigate financial hardships.
- Set up automatic payments: Set up automatic payments to prevent delinquency by ensuring timely loan repayments. This convenient method reduces the risk of missed deadlines, late fees, and adverse effects on credit scores.
FAQs
What does it mean when a loan is delinquent?
A loan becomes delinquent when a payment is not made by the specified due date.
How do I get rid of loan delinquency?
Delinquencies are reported to credit agencies, but you can dispute them online or in writing. Contact the lender, explain the situation, and explore options. Offering to pay the balance may lead to its removal from your credit report.
What happens if a delinquent loan is reported?
Delinquent debt impacts your credit score, staying on your report for up to seven years. Resources like debt relief companies and credit counsellors can assist in repaying delinquent balances.
How can I avoid becoming delinquent?
Avoid delinquency by making timely payments, maintaining open communication with lenders, and seeking financial assistance when needed.
How can I avoid becoming delinquent?
Avoid delinquency by making timely payments, maintaining open communication with lenders, and seeking financial assistance when needed.
How does mortgage delinquency work?
Mortgage delinquency occurs when a borrower misses payments, leading to late fees. Although it may result in foreclosure as a last resort, lenders may offer forbearance agreements for temporary financial difficulties. These agreements allow borrowers to pause or reduce payments temporarily.
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