Is this possible? Yes. Let’s use your example, a 400K mortgage ten years ago. Let’s assume the homeowner stopped making mortgage payments 3 years into the process. So, the last 7 years, mortgage payments were not being made. Don’t forget, there are penalties for late payment or non payment. So, the loan balance, plus tacking on non payments to the current loan balance, plus penalties, the total loan balance will grow quickly. Compound interest is a great thing when investing your money. On the flip side, it is harmful when payments are missed on a home loan.

In addition, there may be more to this situation. The property owner (most likely the bank by this time), will want remedies on all outstanding debt. There could be past due property taxes and penalties. Finally, there may be past due HOA fees, and penalties.

The future property owner (homebuyer) would require all debt to be current upon sale. So, maybe the current loan balance is $540,000 (loan balance + missed payments + penalties + filing fees and court costs). Maybe there is $60,000 due for property taxes + past due penalties + HOA dues + penalties. There could be $600,000 owned based on an original loan balance of $400,000.

You may be thinking the non payment penalties must be huge. Not really. Let’s look at this a different way. What if the homeowner was never in trouble. All payments were made on time. A $400,000 loan will be paid off in 30 years. Doing some simple math, every 7.5 years, the borrower would have paid down the loan by $100,000 (approximately, amortized loans work a little different).

Let’s flip back to reality, no payments were made for 7 years. With basic math, this would mean the loan balance would have grown by $100,000. Now, add compound interest and penalties. Guess what, the loan balance would balloon. As mentioned earlier, it is likely there is property taxes and penalties in this grand total figure.

This is why the bank is claiming the mortgage debt is $600K.

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