Notice of Default

Have you received a notice of default from your hard money lender? While these issuances are serious, they can be remedied. Read on to learn all about notices of default and what to do if you’ve received one.

What Is a Notice of Default?

A notice of default is a formal notification that a lender sends to a borrower to inform them that they aren’t upholding the terms of their loan agreement. This typically occurs when the borrower misses multiple payments and is therefore in default on their loan. A notice of default is the first step in the foreclosure process and warns a borrower that they need to act quickly, or else they may run the risk of losing their property.

How Does a Notice of Default Relate to Hard Money Loans?

Hard money lenders send notices of default when their borrowers fail to uphold their loan obligations. With their significantly shorter timeline, everything can move more quickly in hard money lending. Because of the short terms and high risk associated with hard money loans, a hard money lender may consider their borrower to be in default more quickly than a traditional mortgage lender.

How a Notice of Default Works

Borrowers who fail to meet their loan terms can expect to receive a notice of default. Read on to learn more about how these notices work and the role they play in the foreclosure process.

When a borrower misses multiple payments, they can expect to receive a notice of default from their hard money lender. The process typically follows these steps:

Step 1: Borrower misses payments

The process begins when a borrower misses multiple payments, typically two or more.

Step 2: Lender sends notice

Then, the lender sends a notice of default. It includes both the missed payments and a timeline to send the outstanding payments before the foreclosure process continues. Typically, the lender will charge late fees as well.

Step 3: If the borrower pays outstanding balance

Once the outstanding balance, including any late fees, is repaid, the loan will be considered current and no longer in default.

Step 4: If borrower fails to pay outstanding balance

If the balance remains, the lender can proceed with a foreclosure. Through this process, they will sell the collateral property and recoup the cost of the loan from the proceeds of the sale.

Real‑World Scenarios

Take a closer look at the notice of default with these scenarios.

Default on a Property Renovation

A borrower takes out a $400,000 hard money loan for a property purchase and renovation. Their loan is structured with interest-only payments and a balloon payment at the end of the loan term. The borrower has successfully renovated the property and paid all interest payments, but cannot find a buyer.

60 days after their balloon payment is due, with no sale in sight, they receive a notice of default. The notice informs them that they have 60 days to pay their balloon payment plus late fees, or their property will go into foreclosure. Two weeks later, they find a buyer and successfully pay off their loan plus late fees with the proceeds from the sale.

Default on a Residential Building

A residential real estate investor purchases a 50-unit building using a hard money loan. They plan to pay off their loan over the course of 24 months with the rental income from the building. After 12 months, they’ve only managed to fill half the apartments and can no longer make the required monthly payments on their loan.

After 3 months without payment, their lender sends a notice of default. It states that they need to bring their loan balance current and pay additional late fees, or the lender will proceed with foreclosure. The investor still cannot find renters and is therefore unable to pay off the balance. Their property is put into foreclosure and the lender takes possession of the building. They sell the building off and use the proceeds to pay off the remaining loan balance.

Notice of Default: FAQs

How long do I have to repay my outstanding balance after receiving a notice of default?

Lenders typically give borrowers 30-90 days to repay their outstanding loan balance after receiving a notice of default. If the borrower is able to make the outstanding payments in this time period, their property will be taken out of default and they can continue making loan payments as normal. If they fail to make the payments, their hard money lender can proceed with foreclosure.

Can a lender issue a notice of default for one missed payment?

Yes, lenders are legally allowed to issue a notice of default after a single missed payment. That said, hard money lenders typically give a more significant grace period to allow borrowers to make their account current once again. Before signing your loan, make sure you thoroughly understand your lender’s default policy.

Does a notice of default affect my credit?

Yes, a notice of default can have a significant impact on your credit score. As soon as a notice of default is issued, credit agencies are informed that you’ve defaulted on your loan. If you default on your loan, you can expect your credit score to fall dramatically.

What is the difference between a notice of default and a notice of foreclosure?

A notice of default is the first step in the foreclosure process. It’s a warning that’s issued in the months following one or more missed loan payments. These notices include instructions on how to remedy the situation and bring their loan out of default.

A notice of foreclosure is issued when a borrower fails to remedy their default. This notice informs the borrower that their lender is proceeding with the foreclosure. Once this notice is issued, the lender can begin to take ownership of the property.

Can a lender foreclose immediately after issuing a notice of default?

A lender cannot foreclose immediately after issuing a notice of default. The notice must give the borrower a set amount of time to fix their default, typically 30 to 90 days. Only if the default isn’t fixed in the designated time period can a lender proceed with the foreclosure.

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