Notice of Default and the Foreclosure Process
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A Notice of Default is your mortgage lender’s way of telling you that you have one last chance to address overdue mortgage payments before your lender will foreclose on your home. Once you've received a notice of default you’ll want to act quickly to take advantage of options available to you. Below, we will explain how to understand the information contained within this notice and the steps you should take if/when you receive one.
Written by Attorney Cody J. Harding.
Updated December 31, 2021
If you've received a notice of default you shouldn't ignore it. This is your mortgage lender’s way of telling you that you have one last chance to address overdue mortgage payments before your lender will foreclose on your home. Through foreclosure proceedings, a mortgage company can eventually take ownership of your property and sell it.
Once you've received a notice of default you’ll want to act quickly to take advantage of options available to you. Below, we will explain how to understand the information contained within this notice and the steps you should take if/when you receive one.
What Is a Notice of Default?
A notice of default is filed by a mortgage trustee with a borrower’s local property records office. Though it is a public record, borrowers receive a copy by mail and/or posted at their property. Sometimes it is also published in a local newspaper or on a county website. The required formalities vary by state.
Generally, the notice states the amount owed and the borrower’s and lender’s contact information. It also describes the affected property and gives a deadline for paying the delinquent amount. This is a final warning before the mortgage company begins to foreclose on a borrower’s property. If you have received one of these notices, that means that your property is in pre-foreclosure. Because these notices are publicly reported, this turn of events will have a negative impact on your credit score.
Notice of Default and Foreclosure
Technically speaking, a notice of default is not a foreclosure. Instead, it serves as notice that you are behind in your payments and that your property may be sold as a result of foreclosure if you don’t act soon. If you've received a notice of default, you should understand that the next step for your lender is to begin the foreclosure process. Depending on state law, you may have as little as a few weeks to resolve your outstanding balance in order to avoid foreclosure.
The foreclosure process varies within each state. If you've received a notice of default, you likely:
Live in a state that follows nonjudicial foreclosure, and
Signed a mortgage loan with a power of sale clause.
It can help to familiarize yourself with the nonjudicial foreclosure process if you live in a state that permits these processes. At this time, nonjudicial foreclosures are allowed in the following states:
Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia (sometimes), Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico (sometimes), North Carolina, Oklahoma (unless the homeowner requests a judicial foreclosure), Oregon, Rhode Island, South Dakota (unless the homeowner requests a judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.
Under this process, the mortgage servicer will report your default to your county recorder's office. This office maintains county property records, though its title and duties vary by county. In addition to filing this notice publicly, the servicer must also meet certain requirements before proceeding with a foreclosure sale, but will not be required to file a formal lawsuit before moving forward. Foreclosure processes that require a formal lawsuit are known as judicial foreclosures.
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Information That Will Be in the Notice of Default
A Notice of Default will include the following:
Name and address of the borrower
Name and address of the lender
The property address and description of the property
The total amount owed
A deadline for resolving the amount owed
Next steps if the borrower does not resolve the delinquent amount
Stopping a Foreclosure Sale
Once this notice has been filed, the mortgage servicer must give the borrower time to pursue options. Borrowers must submit a loss mitigation application with their servicer, which is then obligated to present all available options, which may include:
Executing a deed in lieu of foreclosure
Negotiating a loan modification
Pursuing a short sale
This period is called the loss mitigation period and is required under federal law. If a borrower doesn't submit an application within 120 days of the default, the mortgage lender can then schedule a foreclosure sale.
If You Want To Avoid Foreclosure and Keep Your Home
If you do not resolve the default, you will likely receive a notice of sale, which indicates that your property is to be sold at a public auction. A notice of sale publicly announces the details of the auction. Sometimes the highest bidder is an independent buyer, but if the price is not high enough often the lender purchases the property with the intention to resell it.
You may still be able to stop a foreclosure sale if you’ve received a notice of default. The best option is to pay the amount owed. During the redemption period, property owners ust usually pay the full balance owed, if they're able to do so. Depending on where you live, this redemption period may even extend until days after the property is sold at auction. So, there may be a chance to regain ownership even if your property is sold at a foreclosure auction.
If you want to keep your home and can’t afford to pay the full balance owed, you should pursue alternative options offered by your mortgage servicer during the redemption period. For example, you might try to refinance and obtain a new loan to pay off the delinquent mortgage. Or, you could ask your lender for a loan modification that will make your monthly payments more manageable and/or will allow you to catch up on the overdue balance at a later date.
Depending on the time that has lapsed, you may be able to pay the delinquent balance and reinstate the terms of the mortgage—essentially returning to the scheduled repayment plan. Although availability of this solution will vary based on the time that has elapsed, local laws, and terms of your mortgage. In recent years federal legislation and regulation has strengthened borrowers’ rights during this process. Also, the Biden administration has extended a foreclosure moratorium through June 30, 2021, on federally backed mortgages. As the pandemic evolves, another such moratorium may be put into place.
If You Want To Avoid Foreclosure but Can’t Keep Your Home
If you’ve decided that it is best to walk away from your mortgage burden, you could work with a real estate agent to sell your property. But it's important to understand that it may be more difficult to sell under the circumstances. Also, since time is of the essence, you might have to sell your home for less than what is owed — this is known as a short sale. It has its pros and cons.
You might also have the option of executing a deed in lieu of foreclosure, which signs over your rights in the property to the mortgage company. This would allow you to avoid the public record and negative impact on your credit resulting from a foreclosure.
Another alternative is to file for bankruptcy, which will temporarily stop foreclosure proceedings. Filing for bankruptcy initiates an automatic stay (essentially a pause) on any foreclosure proceeding. It’s likely that the lender will ask the court to lift the stay, and they may be successful. Just filing bankruptcy doesn’t relieve your responsibility to pay the mortgage, so the court might allow the lender to proceed. However, if you file for Chapter 13 bankruptcy, the lender may back down as you’ll be able to pay off your delinquent debt over the life of your bankruptcy case.
Because this information is public, be wary of any notices that you receive. Solicitations and scams may come disguised as important documents. Research any individuals or companies who contact you to discuss your property and ensure that you know who you are talking to. Plenty of speculators prey on distressed property owners.
A notice of default should be taken seriously. It may come by mail or be posted on your property. The notice must include information about the property, the amount owed, and what happens next. This is the last step before foreclosure.
If you receive a notice of default, it isn’t time to panic, yet - you still have some options available. Mortgage companies are required by federal law to disclose options and negotiate possible alternatives. Some options could allow you to halt the foreclosure sale. For example, you might stop the foreclosure by selling the property or conveying a deed to the mortgage company. With these options you might gain some profit from your home equity or at least avoid the negative impact that foreclosure has on your credit.
When facing foreclosure, you should stay ahead of the process to ensure that you take advantage of whatever options will serve your interests best. To learn more about your options, visit the Upsolve Learning Center.