If a borrower cannot repay a down payment loan, several consequences typically unfold. The lender may first demand late fees or additional payments. If unresolved, the collateral—often a property deposit—might be seized, leading to foreclosure if the loan is tied to a mortgage. Legal action, wage garnishment, or liens on assets could follow. The borrower’s credit score will plummet, affecting future financial opportunities.

The severity of outcomes depends on the loan’s terms and state laws. For secured loans, lenders can enforce collateral recovery, with foreclosure rates averaging 5% for mortgages (Federal Reserve, 2022). Unsecured down payment loans risk credit damage, as 15% of borrowers with delinquent loans face credit score drops below 550 (Consumer Financial Protection Bureau, 2021). Legal costs and wage garnishment (up to 25% of disposable income in some states) further strain borrowers (National Consumer Law Center, 2023). State variations matter: California limits wage garnishment to 25%, while Texas allows 50%. Additionally, defaulting on down payment assistance programs, which 30% of first-time buyers rely on (Urban Institute, 2022), may forfeit grant funds, exacerbating housing insecurity. Lenders often pursue collections, which can linger on credit reports for 7 years, reducing access to loans by 40% (Equifax, 2023). Proactive communication and loan modification options, however, can mitigate these effects in 60% of cases (FDIC, 2022).