A demand letter is served once repayments haven’t been met. This happens because unmet payments equates to loss for the mortgage lenders. Let’s take a look at what a demand letter is and what to do if you receive one.
What exactly would result in an issue of a demand letter? One thing that issues a demand letter from the lender is defaulting on your mortgage payment or being in breach of one or more of the terms .
The most obvious trigger is failing to meet repayment demands. However, there are also subsequent, which include:
- Not having insurance on your property (or an inadequate one)
- Failure to pay property taxes
- Failure to maintain the property
- Selling without notifying or obtaining consent from the lender
The lender suffers loss if any of the above are met because they will incur losses on the value of the property, which isn’t in their best interest.
If you meet one or more of the above, then your mortgage is defaulted. Your lender could show you leniency and assume you may have forgotten or just became very busy. In this case, they should send you reminders or calls just to make sure.
However, in most cases, they might directly send you a demand letter or which basically “demands” (hence the name) the repayment of your remaining balance or balance owed.
You really do not want to get to this point because if you fail to pay after receiving a demand letter, then the lender has permission to repossess the property.
On top of that, any of the costs that the lender may suffer from when selling your house is added onto your owed fees. There is a way out of this that is better than letting the lender sell the property and that is to sell it yourself.
This can happen if your home is worth more than the loan itself. This will help you keep the equity on the property and maybe make enough to pay off the outstanding balance on the mortgage and keep some leftover for yourself.
Hopefully, the situation on your mortgage will not get to this point. Most people default because they are facing financial difficulties and other issues that may cause them to be unable to pay.
Communication and negotiation is important with your lender and any sort of changes in your life or financial circumstance should be relayed to them. There may be a chance that your lender and you can come to some sort of financial agreement that better suits your needs.
Let’s take a look at consequences of defaulting on your mortgage loans if you do get to this point.
Legal Issues – You may be facing legal issues if you do not pay your mortgage. You could be sued by the lender, which would incur even more staggering fees.
You Take a Credit Hit – Get ready for your credit rating to plummet if this happens. You can rectify it if you start paying or reach an agreement with your lender. However, if your home ends up being foreclosed on, then that is the end of it.
This move will stay on your credit record for years to come, which could affect any future monetary decisions and moves you want to make.
You May be Taxed – If you have an outstanding value yet to be paid on your property, you would need to be taxed on that amount.
Bankruptcy – There are many routes you can take if defaults happen, but one of the last resorts is bankruptcy. You can file for bankruptcy but that would entail your belongings and assets be taken in and sold to pay off the lender.
The government still looks out for you. There are certain terms in contracts that prevent the bank or lender from coming after you hard. They need to provide you with attainable consequences.
You can also file for a Notice of Intention to Make a Proposal. If this is filed before the demand letter expires, then everything is put on pause.
You can turn your banking and loan needs to another private lender that can probably be negotiated to help you out.
Don’t give up anything without proper documentation and proof from the bank. On your part, you need to stick with the script and follow through with the terms without trying to leak your assets or money out the backdoor. If the bank finds out, this will put them on high alert.
Remember that negotiation and communication are the keys to many problems. Now that we know the banks and lenders are required to give you some breathing room, it makes it even easier for you to negotiate terms that both parties can work with.
A lot of banks don’t want to immediately resort to enforcement of the terms in a demand letter because it requires them to expend even more resources to procure costs that they may not necessarily get back.
Since enforcement is a lengthy and often pricey process, banks would want to avoid this just like you would. This in turn gives you even more leverage to communicate and come up with terms for a whole new contract.
This isn’t to say that you should resort to this to negotiate a new deal, but because the consequences of defaulting on mortgage loans is much greater and harder to recover from.
Defaulting and earning yourself a demand letter for your mortgage payment will cost you a lot in the future. It will effect you when you want to purchase a new home, opt for payment plans for larger purchases and more.
Just because you have gotten to the point of a demand letter, that doesn’t mean it’s the end of the line. There are other actions you can take and with proper communication, you can emerge from the other side with some breathing room left to make your payments.
Want to know what happens when a mortgage is not renewed? Read about that, next!