Default
1031 Exchange
Absentee Landlord
Abstract of Title
Adjustable Rate Mortgage (ARM)
Adverse Possession
After Repair Value (ARV)
Amenity
Amortization
Appraisal
Appraised Value
Appraiser
Appreciation
APR
Assessed Value
Asset Protection
Bad Title
Balloon Mortgage
Bank Owned Property
Broker
Broker Price Opinion
BRRRR
Buy and Hold
Buyer’s Agent
Capital Expenditure
Capital Gains Tax
Capital Improvement
Capitalization Rate aka "Cap Rate"
Cash Flow
Cash On Cash Return (COCR or CRR)
Cash-Out Refinance
Cash Reserves
Certificate of Title
Certified Commercial Investment Member (CCIM)
Chain of Title
Clear Title
Closing
Closing Costs
Cloud on Title
Co-Borrower
Commercial Real Estate (CRE)
Comparative Market Analysis (CMA)
Consumer Price Index
Contingency Clause
Contract For Deed
Co-Tenancy Clause
Covenants, Conditions & Restrictions (CC&R)
Curb Appeal
Debt Service Ratio (DSCR)
Debt-to-Income Ratio (DTI)
Deed
Deed Book
Deed Of Trust (DOT)
Default
Deficiency Balance
Delinquent
Depreciation
Downturn
Dual Agency
Due On Sale Clause (DOS)
Earnest Money
Easement
Effective Gross Income
Egress
Ejectment
Eminent Domain
Equity
Equity Stripping
Escrow Agent
Escrow Agreement
Estate
Eviction
Fair Housing Act
Fair Market Rent (FMR)
Fair Market Value (FMV)
Federal Housing Administration (FHA)
Fee Simple
FHA Loan
First Mortgage
Fix and Flip
Fixed Price Purchase Option
Fixed Rate Mortgage
Forced Equity
Foreclosure
For Sale By Owner (FSBO)
Fractional Ownership
Freddie Mac
Gentrification
Gift Of Equity
Ginnie Mae (GNMA)
Graduated Lease
Gross Rent Multiplier (GRM)
Ground Lease
Hard Money Lender (HML)
Hard Money Loan
Hazard Insurance
HELOC
Holding Costs
Home Appraisal
Home Equity
Home Equity Loan
Home Inspection
Homeowners Association (HOA)
Home Warranty
House Hacking
Housing Starts
Individual Retirement Account (IRA)
Inflation
Ingress
Interest
Interest Only Loan (I/O)
Interim Interest
Internal Rate Of Return (IRR)
Intestate
Joint Tenancy
Joint Tenants
Joint Venture (JV)
Judicial Foreclosure
Jumbo Loan
Landlord
Land Trust
Land Value
Lease
Lease Option (L/O)
Lender
Lessee
Lessor
Leverage
Lien
Lien Waiver
Line Of Credit (LOC)
Listing
List Price
Live-in Flip
Loan Estimate
Loan Policy
Loan-To-Value (LTV)
Market Value
Maximum Allowable Offer (MAO)
Mortgage
Mortgage Broker
Multi-Family
Multiple Listing Service (MLS)
National Housing Act
Negative Equity
Net Operating Income (NOI)
Net Worth
No-Appraisal Refinancing
Note
Offer
Open House
Open Listing
Owner Occupied (OO)
Personal Use Property
PITI
Pocket Listing
Power Of Sale
Pre-Approval Letter
Private Mortgage Insurance
Probate
Proof Of Funds
Property Manager
Quiet Title
Quitclaim Deed
Real Estate
Real Estate Agent
Real Estate Broker
Real Estate Owned (REO)
Realtor
Recession
Refinance Rate
Refinancing
REIT
Rent To Own Homes (RTO)
Repair Costs
Reserve Fund
Residential Rental Property
Return On Investment (ROI)
Reverse Exchange
Reverse Mortgage
Rural Housing Service
Sales and Purchase Agreement
Security Deposit
Seller-Financed Sale
Seller-Paid Points
Shared Equity Finance Agreements
Short Refinance
Short Sale
Squatter
Sublease
Syndicate
Syndications
Tax Lien
Tenancy In Common
Tenants By Entirety
Tenement
Timeshare
Title
Title Commitment
Title Defect
Title Insurance
Title Search
Triple Net Lease (NNN)
Truth In Lending
Turnkey
Under Contract
Underwriter
Unsecured Loan
Use and Occupancy
Vacancy Rate
Voluntary Foreclosure
Waiver
Warranty Deed
Warranty Of Title
Workout Agreement
What Is Default?
Default is the failure to repay a debt, including interest or principal on a loan. A default occurs when a borrower fails their financial obligations by not making timely payments, missing payments, or stopping payments altogether.
Defaults can occur on secured debt, such as mortgages, or unsecured debt, including credit cards or student loans. Consequences include lowered credit score, reduced chances of obtaining new lines of credit, and foreclosure.
Defaults can occur on secured debt, such as mortgages, or unsecured debt, including credit cards or student loans. Consequences include lowered credit score, reduced chances of obtaining new lines of credit, and foreclosure.
What Is a Mortgage Default?
Defaulting occurs when the borrower fails to make payments to their mortgage loan servicer and falls behind—putting them at risk of foreclosure. Generally, this process is started within days of a failed payment. Even if the property is not lost during a foreclosure, having a default on your credit report lowers your credit score.
What Happens If I Default on My Mortgage?
If you fail to comply with the terms of a mortgage, then you’re considered in default. The lender can then demand that you immediately repay the entire outstanding balance—also called accelerating the debt.
If you don’t repay the full loan amount, or "cure the default," the lender can foreclose. The most common reason for default is falling behind on the required monthly payments. However, breaching other terms in the loan contract can also trigger default.
For instance, default can happen if:
If you don’t repay the full loan amount, or "cure the default," the lender can foreclose. The most common reason for default is falling behind on the required monthly payments. However, breaching other terms in the loan contract can also trigger default.
For instance, default can happen if:
- You fail to pay property taxes
- You don’t pay homeowners’ insurance
- You allow the property to deteriorate or cause damage that lowers the value of the home
- You transfer the deed to the property to a new owner without getting the lender’s permission.
Default Risks
When a borrower defaults on a loan, the risks can include:
- Negative marks on credit report
- Lower credit score
- Reduced chances of obtaining future credit
- Higher interest rates on debt
- Garnishment of wages and other penalties
- Increased tax bill.
Foreclosures stay on your credit history for up to seven years. And you can't just walk away from your mortgage. If there's a hefty loan balance, your lender may come after you for collection, also known as a deficiency judgement.
Bankruptcy might be a post-default option. However, mortgage liens are not forgiven during bankruptcy. If you owe the bank money and file bankruptcy you will not own the home free-and-clear. This is unlike default on other types of loans, such as credit cards and unsecured personal loans.
Student loans can be discharged with bankruptcy, although it’s still very difficult.
Bankruptcy might be a post-default option. However, mortgage liens are not forgiven during bankruptcy. If you owe the bank money and file bankruptcy you will not own the home free-and-clear. This is unlike default on other types of loans, such as credit cards and unsecured personal loans.
Student loans can be discharged with bankruptcy, although it’s still very difficult.
How Can I Get out of Default?
Start by trying to negotiate with your lender on an affordable repayment plan. This can be done by spreading repayment of the past due amount over several months by adding the extra onto your regular monthly payments.
Consider requesting mortgage forbearance if your financial problems are only temporary. This includes getting a reduction or suspension of monthly mortgage payments for a period of time—typically up to 90 days.
Borrowers may also apply for a mortgage loan modification to get a lower interest rate and longer repayment period. Depending on the reason for your financial troubles, mortgage modification may even forgive some of the loan principal.
Finally, you can ask your lender to consider a short sale agreement. If you don’t qualify for loan modification, your lender may be willing to accept a payoff amount for less than what you owe on your mortgage loan and forgive the remaining balance.
Consider requesting mortgage forbearance if your financial problems are only temporary. This includes getting a reduction or suspension of monthly mortgage payments for a period of time—typically up to 90 days.
Borrowers may also apply for a mortgage loan modification to get a lower interest rate and longer repayment period. Depending on the reason for your financial troubles, mortgage modification may even forgive some of the loan principal.
Finally, you can ask your lender to consider a short sale agreement. If you don’t qualify for loan modification, your lender may be willing to accept a payoff amount for less than what you owe on your mortgage loan and forgive the remaining balance.
How Does the Foreclosure Process Work?
Foreclosure allows a lender to recover the amount owed on by defaulters by selling or taking ownership of the property. While the process varies by state, it usually follows six phases:
1. Payment Default
Payment default happens when the borrower has missed at least one mortgage payment. At this pooint, the lender sends out a nonpayment notice. After two nonpayments, the lender sends out a demand letter.
2. Notice of Default (NOD)
A notice of default is sent out after 90 days of nonpayment. Typically, the lender's local foreclosure department will take over the loan. Once the borrower is notified, lenders typically allow 90 days to settle the loan or initiate the reinstatement period.
3. Notice of Trustee's Sale
If payment has not been met within 90 days following the NOD, a notice of trustee’s sale will be recorded in the county where the property is located. The lender will publish a notice in the local newspaper for up to three weeks with the owner’s name and other details.
4. Trustee's Sale
The property is placed for public auction and will be awarded to the highest bidder. The lender will calculate an opening bid based on the outstanding loan and any liens or unpaid taxes. A trustee's deed is given to the winning bidder, who is entitled to immediate possession.
5. Real Estate Owned (REO)
If the property is not sold during a public auction, it is referred to as real estate owned (REO) or “bank-owned.” Lenders will also remove some liens and other expenses to make the property more attractive, and attempt to sell the property through a broker or asset manager.
6. Eviction
The borrower can stay in the home until it is sold through public auction or later as an REO property. An eviction notice is sent once the home is sold. Several days will be allowed for occupants to remove personal belongings.
How Does a Financial Crisis Affect Default Rates?
During what economists consider normal times, the default rate on subprime mortgages ranges from three to four percent. During the financial crisis of 2008 and 2009, the subprime market default rate went up to roughly 70 percent.
Defaults spike during these times because people are lose their jobs and the value of their assets is declining—including their home value. When pricing mortgages or related financial products, lenders use the models of past default rates as a basis. Typically, banks' standards tighten and default rates fall following a financial crisis, as do the number of mortgages.
Defaults spike during these times because people are lose their jobs and the value of their assets is declining—including their home value. When pricing mortgages or related financial products, lenders use the models of past default rates as a basis. Typically, banks' standards tighten and default rates fall following a financial crisis, as do the number of mortgages.
What Is a Strategic Default?
A strategic default is the decision by a borrower to stop making payments despite having the financial ability to make payments. Strategic default tends to occur after there’s been a large drop in the property’s price, which can put it underwater—where more debt is owed than the property is worth. Borrowers that believe the values will fall further or won’t rebound for the foreseeable future may choose to walk away from the loan and property. It’s estimated that one-in-five troubled mortgages during the Great Recession were strategic defaults.