Notice of Default

What is a Notice of Default?

A notice of default is a formal public notice that is filed with the state court and states that the borrower is in arrears. It is used when a borrower delays in making mortgage repayments, and the mortgage lender files the notice of default as the first step of a foreclosure process.

Some lenders use the notice of default as a formal warning to a borrower that if they do not make the mortgage payments within a specified date, the lender will take action to seize the property. In some states, the lender may be allowed to pin a notice of default on the front door or window of the mortgaged property.

A notice of default is also known as a notice of public auction or foreclosure.

Contents of a Notice of Default

The foreclosure process starts when a lender files a notice of default with the court. The main contents of a notice of default include:

• Name and address of the borrower
• Name and address of the lender
• Name and address of the trustee
• Legal description and address of the mortgaged property
• Terms of the mortgage agreement that have been broken
• Description of the default and the remedy required to bring the account up to date
• Actions that the lender will take if the borrower does not comply
• The grace period within which the borrower is allowed to respond to the notice
• A statement that if the default is not cured before the allowed duration, the lender will sell the mortgaged property at a public auction

How a Notice of Default Works

When a borrower receives a notice of default, it does not mean that the lender has initiated the foreclosure process on the mortgaged property. Lenders serve the notice as a formal warning to the borrower that they risk losing the mortgaged property if they do not settle the delinquent mortgage payments. However, some lenders may serve the notice as the final notification to the borrower before the lender initiates the foreclosure process to seize the property.

Most lenders use the notice of default in non-judicial foreclosure, where the lender goes through an out-of-court process to auction the property. In such a case, the lender is required to file the notice of default at the county recorder’s office.

A notice of default will affect a borrower’s credit history since the information is reported to credit bureaus, which record the information in an individual’s credit report. Lenders will shy away from extending credit facilities to a borrower with a damaged credit score and a history of defaults. Foreclosure proceedings adversely affect a borrower’s credit score, and they will face difficulties in accessing loans from other lenders.

What Happens After the Borrower Receives a Default Notice?

Once a borrower receives a notice of default, they have 14 days to take action. If the buyer successfully negotiates a settlement plan with the lender or pays the amount stated in the default notice within 14 days, the lender will not take legal action against the borrower.

However, if the borrower does not repay the amount in default within 14 days of receiving the notice, the lender can cancel the mortgage agreement, and the default is registered with credit bureaus. The foreclosure process then proceeds to the next stage.

Events that Follow a Default Notice

The notice of default is the final step that a lender takes before activating the lien and foreclosing on a mortgaged property. A lien is a right that the creditor has over the assets of a borrower. The creditor must register the right with the government as a declaration of their interest in the property.

Registering the lien also informs the public that the lien on the property must be released before the property can be available for sale to the public. A notice of default is filed with the state court where the lien is recorded.

Once a lender files the notice of default, the next step is to hold a hearing to activate the lien recorded with the mortgage. The hearing allows the borrower to negotiate with the lender by suggesting a settlement plan for the defaulted payments and legal fees. If the case goes to the approval stage, the lender gets the authorization to initiate the property seizure.

It means that the lender has the power to order the borrower to vacate the property within a specified period, after which the outstanding loan is written off, and the lender invites bids for the property in a public auction.

Additional Resources

CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• General Security Agreement
• Loan Analysis
• Mortgage Forbearance Agreement
• Lien
• See all commercial lending resources