As a homeowner, receiving a notice of default in the mail can be a scary thing. With that in mind, we've taken it upon ourselves to create a guide to this letter. Read on below to learn more about what a notice of default is, where it lies in the foreclosure process, and what to do about it once you've received one. Armed with this knowledge, you should know what next steps to take in order to communicate with your lender and bring your loan up to date.
What is a notice of default?
in real estate, a notice of default is an official notice that the borrower has fallen behind on their mortgage payments and is in default on the loan. Traditionally, this notice is sent from the lender to the borrower by certified mail. However, it may also be filed with the local courts or at the county recorder's office. When the lender sends this notice, it's generally considered to be the first step in the foreclosure process.
Though the exact process and information will vary according to state law, you can usually expect a notice of default to contain the following details:
- The name(s) and address of the borrower(s).
- The name and address of the lender.
- The name and address of the trustee, if applicable.
- The address and a legal description of the property.
- A description of the actions that have caused the borrower(s) to be in default.
- A description of how the borrower(s) can cure the default.
- A deadline by which the default must be cured in order to avoid foreclosure.
- A statement that makes it clear that if the loan is not brought up to date by the deadline, the lender will move forward with foreclosure.
How does a notice of default work?
Now that you're familiar with what a default notice is, the next step is to learn how it works in the foreclosure process. Truthfully, this process will work differently depending on how your state handles foreclosures. To that end, we've taken the liberty of briefly summarizing what to expect from each type of foreclosure below. Read them over to get a better idea of how your state will handle the notice of default.
In a judicial foreclosure state
In a judicial foreclosure state, typically your mortgage will outline how many missed payments you can have before a notice of default gets sent by your lender. Generally, most mortgages allow for 180 days of delinquencies.
However, after that time period has passed, the lender is required to send you a default letter and to file a formal notice of default with the state court in which the lien is recorded. After the default notice has been recorded, there will be a hearing to decide whether or not to activate the lien. In some cases, the borrower 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 court grants the lender a judgment of foreclosure, the lender can move forward with a foreclosure sale. At that point, the lender will file a notice of sale and hold an auction. If the property is sold to the highest bidder, the lender will go back to the court and ask for help evicting the homeowner.
In a nonjudicial foreclosure state
In a nonjudicial foreclosure state, the timeline for foreclosure is often even shorter. Here, the lender or their trustee does not have to go through the court system in order to foreclose on the home. In this case, you will likely have signed a mortgage or deed of trust that contains a power of sale clause, which gives the lender the right to sell the property in order to pay off delinquent mortgage debt.
In this case, all the lender or their trustee has to do is file a notice of default with the county recorder's office. With this type of arrangement, it's not uncommon for the notice of sale and then notice of default to be combined or sent at the same time. Usually, a notice for sale is also published in the local newspaper.
Once the notice of sale has been published, the auction will take place at the specified date and time and the property will be sold to the highest bidder. Again, after that happens, the homeowner will be evicted.
What other effects does a notice of default have?
With all that in mind, it's important to note that receiving a notice of default 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, that is not to say that receiving a notice of default doesn't have an impact. Most of the time, receiving a foreclosure notice like this will have a ripple impact on your finances.
In particular, default notices are reported to your credit bureaus by your loan servicer, meaning that it will have a negative impact on your credit score. Beyond that, though, 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?
As stated above, when the homeowner has a missed payment or a history of missed payments, the best thing to do is get in touch with the lender before they provide you with a written notice of default. In many cases, the lender will be able to work with you to resolve your debt without having to move forward with notice requirements.
Typically, your options will include one of the following:
- Forbearance: When your loan is in forbearance, the lender agrees to temporarily suspend your mortgage payments in order to give you time to get back on your feet. Typically, this option will occur after a one-time set back like a job loss or illness that is temporary.
- Repayment plan: As you might be able to guess, with a repayment plan, the mortgage lender agrees to spread any amount that you owe -- including late fees -- over several months in order to make repayment possible.
- Loan modification: Though loan modification is rare, it does happen. In this case, the lender agrees to permanently change the terms of your loan in order to make repayment easier. Usually, this involves obtaining a lower interest rate.
- Short sale: if you really can no longer afford your mortgage payments, your lender may suggest a short sale. In 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.
The Millionacres bottom line
In short, it should go without saying that you should try your best to avoid default notices and foreclosure proceedings whenever possible. While receiving a notice of default doesn't necessarily mean that your home will go to foreclosure, it's not a good thing. With that in mind, if you ever receive written notice of default, your first step should be to contact your lender as soon as possible and to work with him to bring your loan up to date.