What Does It Mean to Receive a Notice of Default?

Homeowner getting a foreclosure sign on home
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A notice of default is the first step to a bank or mortgage lender's foreclosure process. In some states, the notice of default is attached to the home, often on the front window or door. It states that the person who holds the loan on the house is behind on mortgage payments and the bank is in the process of taking action. If the mortgage is not paid up to date, the lender will seize the home.

Key Takeaways

  • You’ll receive a notice of default if you’ve fallen behind with your mortgage payments to the extent that the lender is getting ready to seize your home.
  • Federal law states that lenders cannot begin the process of taking the home until your loan is more than 120 days late.
  • Some states have other deadlines that dictate how long lenders have to foreclose after giving a notice of default.
  • Federal law prohibits foreclosure while you’re seeking other options, such as loan modification or a short sale.

Federal Foreclosure Laws

It used to be that a lender could file a notice of default when it wanted to, but federal laws since the 2008 mortgage crisis have ensured that banks provide enough time and make many efforts to contact the homeowner before starting the process of taking the home. This means that, in most cases, banks must reach out and offer help by the time a person is 45 days late on their payment. Foreclosures cannot begin in earnest before a person is more than 120 days late.

Extra Steps for a California Notice of Default

Some states have more exact laws. In California, for instance, lenders must contact a person who is late with their house payment at least 30 days before sending a notice of default. This means there must be a formal warning from the bank 30 days before the process to take the home begins.

Once the bank issues a notice of default in the state, the borrower has three months to catch up on all payments. If a person has equity in the home, it might be a wise move to put the home on the market and try to find a buyer. If the borrower finds a buyer who happens to be an investor, the buyer must comply with the Home Equity Sales Act to meet the standards of care in place. These standards protect people who are living in a home in default and give them the right to dissolve the sale within a certain time period.

After 90 days have passed, the lender is must publish a notice for 20 days, during which time the only way a homeowner can stop the foreclosure is to pay off the mortgage in full. After those 20 days, the lender may sell the home to the highest bidder on the courthouse steps.

If no good bid is received, the trustee then conveys the home to the lender. There are times when lenders make the starting bid so high that people won't bid on the home. Some mortgage experts believe that this allows the lender to retain the foreclosed home in its inventory at its original value. This is an accounting move that tends to protect the bank's stock value.

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

Notice of Default and the Short Sale

Federal law does not allow for dual tracking, the process of moving toward taking the home while a homeowner is trying to sell the house in a short sale or working on other options. When a person applies for a short sale or loan modification, the foreclosure process is paused until the application is looked at. California and other states have even more stringent rules for dual tracking.

While a lender always had the option to stop a foreclosure action, it wasn't required to do so. In fact, some investors, even more so before the housing crisis, often went ahead with taking the home if it was the fastest option and might produce more money than a short sale. The Pooling and Servicing Agreement for some home loans also had financial perks that made foreclosures preferred over short sales.

If you are at risk of not being able to pay your home loan, the best thing you can do is let your lender know and stay in touch. Staying in contact could help you explore other options besides having your home being taken by the bank.

The Bottom Line

No one should be taken by surprise by a notice of default. It may be the formal start of the foreclosure process, but it shouldn't come until you're well behind on your loan and your lender has made many attempts to reach you. Federal and state laws will protect you from being stunned by these notices. If you're at risk of default, be sure you know your rights and get in touch with your lender.