What is a notice of default?

Understanding a notice of default

A notice of default is a public notice filed with the court or the county recorder’s office declaring a borrower is in default on their mortgage. At this point, the borrower has already exceeded the number of delinquent payments permitted on the account. This is typically considered part of preforeclosure and is one of the first steps of formal foreclosure.

Because a mortgage is a secured loan, your home serves as collateral. This means it can be seized if you fail to honor the terms of the loan contract. You have a specific number of days to either bring your account current or work out a payment agreement with your lender.

Here’s what’s included in the notice:

• Borrower’s name and address
• Lender’s name and address
• Trustee’s name and address
• Property’s legal address and description
• Details of the loan default
• Actions required to resolve the debt
• Deadline to resolve the default
• Consequences of missing the deadline

How a notice of default works

When you get a mortgage, your loan contract stipulates the total number of delinquent payments permitted before legal recourse is taken. For most loans, this is typically 120 days of missed payments.

“Simple answer: It’s an official written notice about a debt you owe, how much, to whom, and why, how to pay it,” said Lisbeth Ardalic, a loan originator with First Option Mortgage in Suwanee, Georgia. “The first thing you should do is make sure it’s not junk or a mistake. If it’s real, you should either pay it or set up a payment plan. If you don’t do anything, they could send it to collections, and that could hurt your credit.”

She also recommended requesting documentation: “If it were me, I’d ask for copies of everything, including proof of any payments, and keep it all in writing for your records.”

A notice of default can be delivered in multiple ways. In some states, a notice of default may be left on the front door or window of the property. Otherwise, it's typically delivered to the borrower via mail. Depending on your state, this may also be published publicly on a county website or in a local newspaper.

What happens after a notice of default is filed

Here are some steps that follow the filing of a notice of default:

1. In states with a judicial foreclosure process, a hearing is scheduled to consider a foreclosure judgment. During the hearing, the borrower might be given more time to pay off the balance to avoid losing the home.
2. Once the lender obtains a court order for property seizure, it can request that the borrower vacate the property.

In states with a nonjudicial foreclosure process, there is a legally defined waiting period before the lender can proceed with sale of the property. As a borrower, it's critical that you avoid foreclosure by working with your lender to resolve your balance so you don’t risk losing your home.

Impact on credit and financial health

In addition to the risk to your property, a notice of default can also negatively affect your credit score.

Delinquent payments are reported to the credit bureaus and can significantly lower your score. A default can stay on your credit report for up to seven years, making it significantly harder to get a new loan or line of credit in the future. Lenders will be able to see past delinquent payments on your credit report, making it less likely you’ll be approved for a loan.

“If you receive a notice of debt, your credit score will likely be impacted once it is reported to credit bureaus,” said Michael Boggiano, managing partner at Wealthcare Financial in Boca Raton, Florida. “Having a lower credit score means that any loan you need will likely come with a higher interest rate until your credit improves.”

It’s important to resolve your outstanding payments as soon as possible to stop foreclosure, which can damage your credit score even further.

Responding to a notice of default

If you receive a notice of default, it’s important to act immediately. Be sure to review the notice of default carefully. The specific timeline to resolve the issue varies by state. Make sure you understand the full terms and consequences as well as remedial options so you can take appropriate action.

“I know that receiving the notice of debt may be rather shocking, (but) it does not have to define your financial situation,” said Ryan McCallister, founder of F5 Mortgage in Traverse City, Michigan. “I have observed many individuals that have experienced a similar experience, and I can assure you that this can be reversed [when] the right steps are being made.”

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Next, contact your lender to discuss options. If you can't pay your outstanding balance, a mortgage loan modification could help adjust your loan agreement to better suit your finances. Another option may be mortgage forbearance, which temporarily pauses or reduces loan payments in light of financial hardship.

“Unfortunately, there are a lot of scams circulating today, so I always advise people to verify that the debt is legitimate and actually belongs to you,” Boggiano said. “Under the Fair Debt Collection Practices Act, you have the right to request written validation of the debt. If it’s not accurate, dispute it immediately in writing.”

If you're able to pay the outstanding balance or negotiate a debt settlement with your lender, your lender will take no further legal action. However, if you fail to resolve the issue with your lender within the allotted time period, the lender is free to cancel the mortgage, activate the lien and pursue foreclosure. The property can then be sold by the lender at a public auction.

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With more and more homeowners falling behind on their mortgages, it's more important than ever to understand the repercussions of missed mortgage payments, including how a notice of default can lead to foreclosure and how to prevent a foreclosure.

“I always believe in talking to a financial advisor or a lawyer so that you are well informed of what is in store,” McCallister said. “With these, you will be in a position to protect your credit, and you will be on track of regaining control of your money.”