Mortgage Collections: What Are They and How Do They Work?

Nobody wants to be in a position where they struggle to keep up with their mortgage debt. Some homeowners target the problem immediately, such as by working with their lender to refinance, whereas others take on additional debt to provide a quick fix to their homeownership woes.

If you’re in a position where you’re facing collections, you’re not alone. Today, 18% of Americans struggle to pay their rent or mortgage. With a cost of living crisis and rampant inflation, what can we do if we find ourselves in a position where mortgage collections are a real risk?

What are Mortgage Collections?

Collections represent a genuine risk for anyone who regularly misses their monthly mortgage repayments. In September 2023, the average monthly mortgage repayment reached $2,612, just $18 below the all-time record.

So, what happens if your mortgage gets sent to collections?

Just like any other type of debt, you’ll be facing calls and knocks on the door from collections agents. Since mortgages are a type of debt, you can find yourself looking at mounting debt, foreclosure, and repossession.

Mortgage collections are perfectly legitimate, but your mortgage provider and their collections agents must follow stringent rules regarding handling this part of the process. Failure to do this can land them in court and derail their collections process.

In the U.S., collections laws are governed by the Fair Debt Collection Practices Act (FDCPA), which protects ordinary people against abusive practices by collection agents. As with other forms of consumer debt, the FDCPA’s protections also apply to mortgage debt. However, if you’re wondering if you can still can you get a mortgage with collection? The answer is yes.

Protecting Yourself Against Mortgage Arrears

Your home is your most significant asset, which should be the monthly debt you service first.

When you feel like you are facing trouble, the answer is never to bury your head in the sand. Waiting to deal with the problem will only reduce your options and leave you facing foreclosure and repossession.

Even a single missed payment can catch up on you. Furthermore, each missed payment adversely impacts your credit score, making it even more challenging to hunt for new deals.

How Soon Can Your Lender Move to Send Your Mortgage to Collections?

Before foreclosing on your home, lenders must provide advance warning and also seek to provide alternative solutions to enable you to stay in your home. These rules are designed to help avoid a repeat of 2008, where tens of thousands lost their homes.

In the U.S., mortgage providers must provide a written notice 45 days before foreclosing on your home. They must also provide various options, such as a loan modification or short sale.

Unlike other types of debt, whereby collections agents will take your possessions, the collections process relating to mortgages involves taking possession of your home.

What are Your Options for Avoiding Mortgage Collections?

Mortgage collections can be avoided even if you find yourself in financial turmoil. Searching for the best debt relief company and seeking professional advice is a wise move. But these options are only effective if you act quickly.

Wait until your home is days away from foreclosure, and your options become extremely limited.

Engaging with your lender is the best option for preventing collections. Your lender doesn’t want to remove you from your home. They want you to continue paying your mortgage, so if you explain the situation, most lenders will work out a deal.

So, what are your options?

Extend Your Mortgage Term

Homeowners on a 20-year mortgage may have the option of extending their mortgages to a 25-year mortgage.

Although you will find yourself paying off your home for an extra five years, increasing your loan’s term will bring down your monthly repayment. Be aware this will result in you paying more in interest in the long term.

This can be an intelligent option if you are still financially buoyant but fall short of the required monthly repayment.

Apply for a Payment Holiday

Payment holidays are another option that may be available. These allow you to pause your mortgage repayments for a limited period to give you breathing space.

The missed months are then added onto the back end of your mortgage, thus extending your term.

Be aware that whether you get them depends on the bank. Most banks look for a valid reason to provide one. For example, you may have proof that you are starting a new job soon. Likewise, you may be temporarily off work due to a major surgery.

The earlier you request a payment holiday, the likelier you are to be accepted.

Switch to an Interest-Only Mortgage Temporarily

Rather than paying off the loan principal, some homeowners opt to pay the interest on the loan for a few months to improve their personal cashflows.

Naturally, you will pay more in interest overall, but it’s the simplest way of dodging mortgage collections.

This option makes the biggest difference if you are nearing the end of your mortgage.

What Happens if Your Home Enters Mortgage Collections?

Foreclosing on your home means that your lender will take back the property. Although you will not be evicted immediately, the result is that you will lose your home in the end.

But the bad news doesn’t stop there.

If your bank sells your home, they’ll usually sell it via auction, meaning they won’t get the total market value for the property. If the sales cost doesn’t cover what you owe, you could still be stuck in mortgage debt, which typically means entering bankruptcy proceedings.

Another problem is all repossessions go down on your credit record. Lenders may be reticent about giving you another mortgage if you’ve been through the process.

Sadly, most repossessions happen in part due to homeowners ignoring the problem. Ignoring letters from your lender and not being proactive with seeking out debt relief avenues only makes it likelier that you’ll lose your home.

In short, acknowledge the problem. Be proactive. Decrease your chances of losing your home.

Wrap Up

Did you know that U.S. foreclosures are up 187% from the year before? More and more Americans are drowning in debt, but there is support from debt relief companies.

Enlist professional help from the minute you figure out that you’re in trouble, and there’s a strong chance that you can navigate troubled waters and get yourself back on track.