What is Imminent Default?

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When a borrower misses payments on a mortgage, it is known as defaulting. Defaulting on a mortgage loan is a serious matter, and can lead to foreclosure on your property. Generally, defaulting is a situation that is dealt with when reached. However, many borrowers are unaware that lenders have the ability to determine when borrowers reach a state of what is known as “Imminent Default”. This is when a borrower is more than likely to default on the loan agreement. 

A technical term in the mortgage industry, imminent default describes a state where a borrower has not yet defaulted on a mortgage loan but is extremely likely to do so based on changes to their financial situation. Imminent default is almost exclusively used as a trigger or deciding factor that lenders consider for mortgage modification eligibility. Mortgage modification is when a lender adjusts the loan terms of a mortgage loan to lessen the monthly mortgage payments of a borrower at risk for foreclosure.

How Imminent Default is Determined

Since the housing crisis of 2008, more pressure has been put on lenders to try to identify borrowers at risk for foreclosure. The added pressure has lead many banks and lending institutions to try to jump ahead of a possible foreclosure scenario before it begins. As a result, servicing borrowers in the imminent default phase became just as important as servicing the borrowers who had already defaulted on their home loans.

As of today, there are two major definitions for imminent default. The first (and most widely accepted definition) comes from Fannie Mae and Freddie Mac, who service almost half of the entire nation’s mortgages. They describe imminent default is a financial condition in which default is “reasonably foreseeable”. In addition, owner-occupant borrowers who are either current or in default but less than 60 days delinquent on a payment are still eligible under the Fannie and Freddie imminent default guidelines.

The Federal Housing Administration has a slightly different take on the definition. The FHA’s definition for imminent default is when a borrower is current or less than 30 days past-due on the mortgage payment. That borrower must also be experiencing a reduction in income or other financial hardship that prevents them from making the next required payment in a timely manner.

Regardless of the definition used, a borrower seeking loan modification must still prove their financial hardship is substantial enough to cause them to miss making their mortgage payments.

Imminent Default Evaluation Software

So as not to be left up to human error, lenders often collect data about any given borrower’s financial situation, assets, and financial hardships. This information can be processed using industry standard software to determine whether or not a borrower is in fact in imminent default. 

Imminent Default Indicator or “IDI” is one such software that the major companies use in their determinations. IDI is an industry tool that takes data on both the borrower and the mortgage loan in conjunction with current market conditions to help determine if the borrower is in imminent default. 

Software such as this is designed to make the process of determining imminent default a more consistent, standardized procedure. 

What to do if your Lender Determines that you are in Imminent Default

If you weren’t looking into a loan modification yet, but have experienced a financial hardship and missed a mortgage payment, then your lender may choose to evaluate you for imminent default. In many cases, borrowers who suffered a one-time delinquency can move forward after sorting things out with their lender. If this isn’t the case, and you are actually in the imminent default phase, then action will be required. While it may sound scary, it is actually best that your lender is willing to have the discussion with you about your mortgage payments moving forward. 

Getting the opportunity to discuss foreclosure prevention from the early stage of imminent default is more of a gift than many realize. The best way to prevent foreclosure is to take preventative steps as early as possible. There is no earlier time than being classified in the imminent default category.

Should you find yourself in this position, don’t panic. The resulting discussion with your lender will not be a scathing one, rather a way to discuss strategies to avoid the impending foreclosure. 
The main focus of which is typically centered around mortgage modification. 

Mortgage Modification

 

Many lenders have some form of mortgage modification program, which aims to reduce your monthly mortgage payments. In order to accomplish this, they examine the terms of your mortgage loan and make adjustments that help to reduce the payment amount. Some adjustments include:

  • Extending the loan term

  • Reducing the Interest Rate

  • Adding missed payments to the remaining principal

  • Temporarily subtracting a set amount from the loan balance and recalculating the monthly payments based on the remaining balance

    • The subtracted portion is still owed but will be collected in the form of a balloon payment due when the borrower sells the home, refinances the loan, or at the end of the loan term

  • Permanently subtracts a portion of the principal amount (complete principal forgiveness is not meant to be paid back, and is extremely rare)

  • Switching from an adjustable rate mortgage to a fixed rate mortgage

To provide payment relief, lenders will use one or a combination of those actions. When the strategy is decided, you will be placed on a trial period which typically lasts around 3 months, in order to see if the proposed adjustments work. If you can make all of the trial payments, the modifications are approved and implemented permanently.

At home.loans, we view it as a part of our duty to help homeowners avoid foreclosure at all costs. We strongly advise any homeowner experiencing financial hardships to reach out to our mortgage experts or their lender to get ahead of the problem and find a solution that will make the foreclosure process unnecessary.


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