Most people know that if they fall behind on mortgage payments, the lender (or subsequent loan owner, called an "investor") can foreclose, which is a consequence that’s clearly spelled out in the mortgage or deed of trust the borrower signs when taking out the loan. But that agreement contains other “do’s and don’ts” which, if not followed, can also get you in hot water.
When you violate the important terms of the mortgage or deed of trust, you risk “defaulting” on the loan and triggering the lender's right to sell the property. For instance, if you fail to pay the property taxes or the homeowners' insurance, the lender might initiate foreclosure proceedings.
You might also face a foreclosure if you don't pay your homeowners' association (HOA) fees or don't abide by the community's rules, or if you send your monthly payment to the wrong loan servicer.
When Can a Bank Foreclose On My Mortgage?
In addition to foreclosure for not making the payments, your home could be foreclosed in these situations as well.
Failing to Pay the Property Taxes
Your lender has every reason to want you to stay current on your taxes—if you don’t, the taxing agency can file a property tax lien against the property, sell the house, and use the proceeds to pay off the tax debt. Even worse, as far as the lender’s concerned, the lien has priority over the lender’s claim, which means that the lender will get paid after the agency is paid out and the lender could stand to lose a significant amount of money.
When a homeowner fails to pay property taxes, assuming there isn't an escrow account in place to pay them, the servicer (on behalf of the lender) will send a letter reminding the borrower to stay current. If the taxes remain unpaid, the servicer will most likely pay the bill to prevent a tax sale, and, if you don’t reimburse the servicer, it might foreclose.
Even if you do pay the debt, you might be required to establish an escrow account (more about this below) to ensure the payment of the taxes in the future.
Failing to Pay the Homeowners' Insurance
Mortgage and deed of trust contracts also require the borrower to maintain homeowners' insurance on the property. Again, there’s a good reason why: If repairs aren’t made to property damaged by fire, storm, or another calamity, and a loan default occurs, foreclosing on the property might not fully reimburse the lender. The insurance policy is in place to ensure that the home retains its full value.
Unlike property taxes, however, when you don’t pay your homeowners' insurance (again, assuming you don't have an escrow account for this purpose), the lender probably won't advance money to pay the insurance premium. Instead, it will likely purchase a "force-placed," also called a "lender-placed," insurance policy.
That doesn’t mean you’re off the hook, however. The lender will recoup its loss by asking you to pay the cost of the force-placed insurance, which is typically more expensive than the previous policy. If you don’t pay the additional amount, you’ll be in default under the terms of the loan contract and the lender can foreclose. As if that’s not bad enough, force-placed insurance won’t cover your household contents if a fire or other event damages your belongings; the lender cares only about the structure, not its contents.
Other Mortgage Violations
Other types of contractual violations could also lead to a foreclosure. For instance, failing to maintain the property in satisfactory condition, or transferring title to a different owner in violation of a due-on-sale clause (a clause that states that the full loan balance must be repaid immediately if the property is sold or transferred to a new owner) might constitute a breach of the loan terms. The lender could then initiate a foreclosure if it chose to do so; however, many lenders will give you the opportunity to correct the problem before starting the foreclosure process.
Making a Payment to the Wrong Loan Servicer
After you take out a mortgage loan, the lender might sell the loan or the right to service the loan (apart from ownership of the loan) to a different party, which will then service the loan. The new servicer might then hire a vendor, called a "subservicer," to take on the servicing duties, rather than servicing the loan itself. You should receive notice of any transfer. However, mistakes happen and you might inadvertently send your payments to your old servicer.
Under federal law, if the old servicer receives your payment it may choose to either:
- transfer the payment to the new servicer to apply to your account, or
- return the payment to you and let you know the proper recipient for it.
But sometimes payments sent to the old servicer get misplaced during a transfer, which means the new servicer might not credit the payments to your account. If you send payments to the old servicer, but they aren't returned and the new servicer doesn’t credit them to your account, you might eventually face a foreclosure.
Talk to a Lawyer
If you think your lender might initiate foreclosure proceedings, it's a good idea to discuss your case with an attorney. For additional details about the benefits of retaining a lawyer in a foreclosure action, see When Should I Hire a Foreclosure Attorney?