(1.) When the borrower fails to honor and complete the terms of the loan agreement. After 90 or more days of delinquency, the loan is considered in default.

(2.) Default on a mortgage typically results in foreclosure or renegotiating the loan. In order to renegotiate a loan, one must prove financial hardship.

Options after Default

Mortgage Modification

Foreclosures cost banks money, which is why they are never eager to do it. Because of this, lenders are usually willing to work with you to create a plan to correct a default and bring your loan current. However, keep in mind that the lender's willingness to work with you greatly depends on your payment history. As much as a lender does not want you to foreclose, they will be reluctant to work with a client who has a record of unexplained chronic late payments.

Short Sale

In a very depressed Real Estate Market, the Short Sale becomes a very viable option. Essentially, the bank is willing to take less than what is owed in an effort to rid the property of their books and write off the subsequent loss. For example, if you owe $200K to bank XYZ and are behind several payments, you (or someone else) can call the bank and offers to buy the note for $160K. Depending on the market, banks may take anywhere from 10 to 20% (or more) below the note value for a property.

Sell Your House

This may seem like the quickest answer and more often than not, it is. However, if you need out of your house fast and are in a down real estate market, expect to discount the house by 20% or more to get it off the market quickly.