PROPERTYSPARK ARTICLE

What Is Delinquent Real Estate: A Beginner’s Guide

Real estate has so many investment opportunities. From luxury apartments to commercial properties, they all promise high returns. However, because of the significant investment required, many people turn to financial institutions for loans to finance these projects.

While this is a viable solution, the borrower must ensure they can meet the financial obligation of owning such property. There will be mortgage repayments, property taxes, and other associate fees. When a property owner doesn’t meet these obligations, the property becomes delinquent.

A delinquent property is a property that the owner has fallen behind on payments related to the property. It can be mortgage payments or property taxes.

Mortgage Delinquency

Mortgage delinquency occurs when a homeowner fails to make mortgage payments stipulated in the financial institution contract. At that point, the lender will add a late fee to the mortgage balance. However, most mortgages have a grace period of a few days after the due date before a late fee is applied.

If you pay before the grace period expires, you are forgiven. However, if no payment is made, a late fee applies. In addition to late fees, mortgage delinquency will damage your credit score and ultimately lead to foreclosure, where the lender repossesses the property.

Property Taxes Delinquency

Tax delinquent properties occur when owners fail to pay their taxes within the required time. Every property owner is legally required to pay property taxes, which is the money the government uses to fund projects.

Once a property becomes tax delinquent, the local government will notify the owner to make payments within a specified time. If the owner fails to do so, the government can seize and sell the property to recoup the owed taxes. Depending on municipality law, this can be done through a tax lien sale or a tax deed sale.

Causes of Delinquency

When investors buy a property through a loan, they aim to repay it and profit by selling or renting it. However, situations can change, leaving them in delinquency. During the recession, property values and demand decreased. As a result, property owners hoping to sell their properties at a higher value may face difficulties repaying mortgages or paying property taxes.

Property owners can fail to meet their financial obligations if they lose their jobs or suffer a financial crisis. Sometimes, the borrower may have been subjected to predatory lending practices, such as high interest rates, hidden fees, or unfavourable terms that make it difficult to repay the loan and pay property taxes. As a cautious borrower, get quotes from different lenders to determine fair rates.

Property Owners

You’ll incur costs once your property becomes delinquent, increasing your debt. If you don’t pay the amount as required, the government or financial institution will initiate foreclosure, which means you will lose ownership of the property.

This is a huge setback to your portfolio and affects your credit score. As a result, it will be challenging to get financing in the future, and even when you do, you’ll get higher interest rates.

Financial Institution and Governments

While the lender may eventually recover their money through foreclosure, the process is lengthy and expensive. It is also possible that not all of it will be recouped if the house is damaged or declines in value.

Similarly, delays in paying property taxes can result in delays in dispensing money for various projects. This affects the quality of service given to the public.

How to Avoid Delinquency

Delinquency can affect your investment journey in many ways. You should avoid risky investments. While buying a property through financing seems like a smart decision, you must evaluate your financial capabilities beforehand. Don’t buy several properties just because they seem like a good investment.

Also, budget wisely. Property taxes are paid annually, so you have a year to earn money. If you have financial constraints, prioritize debt repayment and basic needs. In addition, the financial institution should modify the terms to make the mortgage more affordable. This can be done by increasing the repayment term to lower monthly payments or forbearance if you are dealing with a temporary situation.

Investing in real estate is one of the best ways to diversify your portfolio. However, you must make sound financial decisions to avoid delinquency. Before making any new real estate investment, evaluate your financial situation to determine if it’s sustainable. Don’t gamble on risky investments that could lead to mortgage or property tax delinquency.