What happens when you default on a loan?

[TMNT]

Just curious, I see a lot of properties that are sold by the bank as Mortgagee in posession/bankruptcy sales etc. etc.

Assuming it was purchased under an individuals name or even trust,

obviously if its gotten to this stage, then you have defaulted on a lot of payments and the bank has kicked you out

is the individuals credit ruined for life ie like a bankruptcy?

What are the realistic implications of anyone who's property has been repossesed by the banks?

 

[Ausprop]

if the bank gets their money back then probably no consequences

 

[Ausprop]

don't bother applying with them for another loan tho LOL

 

[Peter_Tersteeg]

don't bother applying with them for another loan tho LOL

Quite true. Banks have memories far longer than credit files.

At a minimum a default/judgement will be lodged on the borrowers credit file. It'll state the amount (being for the full loan) and will be on there for at least 5 years.

Whilst this doesn't eliminate people from borrowing money whilst their credit file shows the problem, it destroys any chance of getting finance via a mainstream lender. Other non conforming lenders will still give them finance, but with higher rates, higher fees, lower LVRs.

Time heals most wounds. Eventually the credit file clears up and most is forgiven. Don't ever ask the same lender for money again, but others would eventually talk to you.

Depending on what you do for a living, certain things on the credit file may restrict you from certain jobs company directorships. For example you can't be a mortgage broker if you've been previously declared bankrupt.

Fortunately this is not something that happens as often as the newspapers would have you think, a lot of these problems can be avoided entirely if you're proactive about it. If things are starting to get tough, talk to your bank. They have programs to help customers work things out if you're up front about it. If you try hide from the problem, it only makes it worse when it inevitably comes to a head.

 

[TMNT]

don't bother applying with them for another loan tho LOL

well obviously!

but wouldnt their credit be ruined???

 

[Brady]

Quite true. Banks have memories far longer than credit files.

At a minimum a default/judgement will be lodged on the borrowers credit file. It'll state the amount (being for the full loan) and will be on there for at least 5 years.

Whilst this doesn't eliminate people from borrowing money whilst their credit file shows the problem, it destroys any chance of getting finance via a mainstream lender. Other non conforming lenders will still give them finance, but with higher rates, higher fees, lower LVRs.

Time heals most wounds. Eventually the credit file clears up and most is forgiven. Don't ever ask the same lender for money again, but others would eventually talk to you.

Depending on what you do for a living, certain things on the credit file may restrict you from certain jobs company directorships. For example you can't be a mortgage broker if you've been previously declared bankrupt.

Fortunately this is not something that happens as often as the newspapers would have you think, a lot of these problems can be avoided entirely if you're proactive about it. If things are starting to get tough, talk to your bank. They have programs to help customers work things out if you're up front about it. If you try hide from the problem, it only makes it worse when it inevitably comes to a head.

Cant give kudos have to share the love. But well put Pete.

Takes a fair bit for the bank to default. It's the worst case senario as the bank makes more money by you keeping the loan and paying interest. It's also bad publicity in alot of cases for the bank, again not good business. In all cases I've seen where the bank shuts up shop on the client is when the client stops communicating to the bank.

In most cases there is some sort of resolution, best be proactive about it.

 

[Brady]

well obviously!

but wouldnt their credit be ruined???

As in the bank will still have record past the 5-7 years of the bad credit file. Even though your 'credit file' will be clear the bank will still have knowledge that they lost money to you past that in some cases.

 

[Peter_Tersteeg]

As in the bank will still have record past the 5-7 years of the bad credit file. Even though your 'credit file' will be clear the bank will still have knowledge that they lost money to you past that in some cases.

I've seen banks decline loan applications because the borrower has a credit card with them that's had a few late payments. There's no default there, but if the lenders own analysis suggests they're going to have to changes the borrower for money on a regular basis, that lender is happy to let the business go.

 

[Terry_w]

Don't forget the mortgagee can come after other property the mortgagor owns if there is a shortfall, even if that property was not used as security. If it was used as security it will be gone quicker though - e.g. cross collateralising.

Watch out for parental guarantees. Someone just emailed me asking for advice on a dreadful matter....They basically have to keep paying a loan for a property gone at a loss or the parents property will be taken.

 

[Redom]

Cant give kudos have to share the love. But well put Pete.

As usual, great informative post Pete - i'll do it for you Brady!

 

[TMNT]

Quite true. Banks have memories far longer than credit files.

At a minimum a default/judgement will be lodged on the borrowers credit file. It'll state the amount (being for the full loan) and will be on there for at least 5 years.

Whilst this doesn't eliminate people from borrowing money whilst their credit file shows the problem, it destroys any chance of getting finance via a mainstream lender. Other non conforming lenders will still give them finance, but with higher rates, higher fees, lower LVRs.

Time heals most wounds. Eventually the credit file clears up and most is forgiven. Don't ever ask the same lender for money again, but others would eventually talk to you.

Depending on what you do for a living, certain things on the credit file may restrict you from certain jobs company directorships. For example you can't be a mortgage broker if you've been previously declared bankrupt.

Fortunately this is not something that happens as often as the newspapers would have you think, a lot of these problems can be avoided entirely if you're proactive about it. If things are starting to get tough, talk to your bank. They have programs to help customers work things out if you're up front about it. If you try hide from the problem, it only makes it worse when it inevitably comes to a head.

Brilliant response, thanks, a big fat kudos to you!

 

[Ausprop]

Watch out for parental guarantees. Someone just emailed me asking for advice on a dreadful matter....They basically have to keep paying a loan for a property gone at a loss or the parents property will be taken.

paying interest on the shortfall until that principal amount (i.e. the shortfall) is repaid you mean?

 

[Terry_w]

paying interest on the shortfall until that principal amount (i.e. the shortfall) is repaid you mean?

Yes, they still owe money even though there is no property.

 

[tobe]

Why is that dreadful? Its pretty clearly explained in the mortgage docs, and by the lender. You would hope its also explained when they take the mandatory independant legal advice....

 

[albanga]

Just curious as to what you mean by 5 or 7 years for bankruptcy?
I thought enquiries and defaults sit on your credit file for 5 years whilst bankruptcy is on your file for 7.

Are you saying someone who goes bankrupt might only have it in their file for 5 years?

 

[Ausprop]

Why is that dreadful? Its pretty clearly explained in the mortgage docs, and by the lender. You would hope its also explained when they take the mandatory independant legal advice....

it can also be clearly explained that one day you may get cancer, doesn't make it any less dreadful should it happen

 

[tobe]

it can also be clearly explained that one day you may get cancer, doesn't make it any less dreadful should it happen

but the doctor (in this case lawyer) would be that surprised?

What I am getting at is its only the remainder being chased, because its a limited guarantee. Previously if there was a shortfall the parents home would be sold, period.

 

[Terry_w]

but the doctor (in this case lawyer) would be that surprised?

What I am getting at is its only the remainder being chased, because its a limited guarantee. Previously if there was a shortfall the parents home would be sold, period.

I am not sure if it was a limited guarantee or not, but not nice to have to pay a loan with no property at the end of it. But as you imply, they all knew the risks...

 

[HeadsOnBeds]

I've seen two this year where husbands have suddenly died and partner left couldn't qualify for funds. Not sure if this would effect wife's credit!