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About Notice of Default in Real Estate
As a homeowner, when you receive a notice of default it can shake your world.
Keeping that in mind, let us learn more about what is a notice of default, where does it fit in the foreclosure process, and when you have received one, what has to be done about it.
So you know what steps to take in order to communicate with your lender and bring your loan up to date.
What is a Notice of Default?
When the borrower has fallen behind on his mortgage payments and is in default on the loan an official notice is sent.
The borrower receives this notice by certified mail from the lender. This notice may also be filed with the local courts or at the county recorder’s office.
This notice, which the lender sends is generally considered as the first step in the foreclosure process.
Depending on the state law the exact process and information will vary, however, a notice of default contains the following details:
- The borrower’s name and address.
- The Lender’s name and address.
- If a trustee is applicable then their name and address.
- The legal description of the property and its address.
- A description of the actions that have caused the borrower to be in default.
- A description of how the borrower can cure the default.
- A deadline to clear the default in order to avoid foreclosure.
- And a statement making it clear that if by the deadline the loan is not brought up to date then, the lender will move ahead with the foreclosure.
How Does a Notice of Default Work?
Now that we have a picture of what a notice of default is, we need to know how it works in the foreclosure process.
The process however will work differently depending on how your state handles foreclosures. Let us briefly know what to expect from each type of foreclosure and how your state will handle the notice of default.
In a Judicial Foreclosure State
In a judicial foreclosure state, your mortgage itself will outline how many missed payments you can have before a notice of default is sent by your lender. Most mortgages generally, allow 180 days of delinquencies.
And after that time period has passed, the lender sends you a default letter to file a formal notice of default with the state court in which the lien is recorded.
After the recording of the default notice, there will be a hearing to decide whether or not to activate the lien.
The borrower in some cases must be given a chance to rectify their delinquent payments or to reach a settlement with the lender before the lien can be called into action.
Once the lender gets a judgment of foreclosure granted from the court, he can move forward with a foreclosure sale.
The lender at that point, will file a notice of sale and hold an auction. After the property is sold to the highest bidder, the lender will take the help of the court in evicting the homeowner.
In a Nonjudicial Foreclosure State
The timeline for foreclosure in a state with a nonjudicial foreclosure is often even shorter. Here, in order to foreclose on the home the lender or their trustee does not have to go through the court system.
You will likely have signed a mortgage or deed of trust containing a power of sale clause, giving the lender the right to sell the property in order to pay off delinquent mortgage debt.
All the lender or their trustee has to do in this case, is to file a notice of default with the county recorder’s office.
In this type of arrangement, it is common for the notice of sale and notice of default to be combined or sent at the same time. Notice for sale is usually published in the local newspaper.
The auction will take place once the notice of sale has been published, on the specified date and time and the property will be sold to the highest bidder. The homeowner will be evicted after that happens.
What other Effects Does a Notice of Default have?
When you receive a notice of default it does not necessarily mean that you have to go all the way through to foreclosure and eviction.
In most cases, the lender will give you plenty of chances to become current with your loan, which will stop the foreclosure process entirely.
However, receiving a notice of default definitely has its impact. Because most of the time, when you receive a foreclosure notice like this it will have a ripple impact on your finances.
Because default notices are reported to your credit bureaus by your loan servicer, means that it will have a negative impact on your credit score. And it may also have an impact on your ability to be approved for another loan in the future.
How Should Property Owners Respond to a Notice of Default?
When the homeowner has a missed payment or has a history of missed payments, the ideal option is to get in touch with their lender before they provide written notice of default.
Many times, the lender will be able to work with the borrower and resolve the debts without having to move forward with notice requirements.
The Borrower’s Options will Include One of the Following:
- Forbearance: When the loan is in forbearance, and the lender agrees to temporarily suspend the borrower’s mortgage payments in order to give him time to get back on his feet. This option occurs after a one-time setback like a job loss or illness, which is temporary.
- Repayment plan: With a repayment plan, the mortgage lender agrees to spread any amount that the borrower owes, including late fees over several months in order to help with repayment possibility.
- Loan modification: Even if a loan modification is rare, it does happen. In this case, the lender agrees to permanently change the terms of the loan in order to make repayment easier where a borrower can obtain a lower interest rate.
- Short sale: if the borrower cannot afford his mortgage payments, the lender may suggest a short sale. The lender agrees to sell the home for less than it’s worth in order to obtain some repayment for the asset in a short sale.
Conclusion
You should try your best to avoid default notices and foreclosure proceedings whenever possible.
When you receive a notice of default it doesn’t mean that your home will necessarily go to foreclosure.
Keep in mind, that if you ever receive written notice of default, your first step should be to contact your lender as early as possible and to work with him to bring your loan up to date.
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