Definition of Mortgage Default
Default is the failure to repay a loan pursuant to its terms or otherwise fail to abide by loan terms, usually permitting the lender to seek all remedies under the loan contract. The lenders remedies for default include demanding full repayment and seizure of the property pledged as collateral.
In a real estate loan transaction, the borrower is required to make periodic payments to the lender, whether weekly, bi-weekly or monthly. The borrower is also normally required by the loan documents to do such things as maintain hazard insurance on the property, and to pay real estate taxes as they come due.
If the borrower fails to perform these obligations within a certain time as stated in the loan document, usually within 30 to 90 days, the lender can declare the borrower to be in default.
Mr. McGillicuddy takes out a mortgage for $200,000 from a bank, with a provision that any payments overdue for more than 90 days will cause the loan to be in default. In year 4 of the loan, Mr. McGillicuddy fails to fall behind on the loan for 91 days. Mr. McGillicuddy is in default.
Mrs. Danforth takes out a mortgage for $200,000 from a bank, with a provision that she will pay any and all real estate taxes within 60 days of becoming due. Mrs. Danforth fails to pay the real estate taxes on the property for more than 60 days after becoming due. Mrs. Danforth is in default.
Remedies in the Event of Default
In reading a loan document, the lender will have a list of remedies they may seek if the borrower is in default. These include demanding the entire mortgage as due and payable, that the loan will be charged a higher interest rate, or default rate, that the bank may take possession of the property.
If the lender takes possession of the property, it will normally sell it and apply the proceeds to the property. This is commonly referred to as a foreclosure. The default will be reported to the borrower’s credit reporting agency and will negatively affect their credit score. If the loan documents permit, or if the lender agrees, the lender may allow the borrower to cure the default, by rectifying the missed obligations under the loan contract. If the default is cured, the borrower will continue to repay the mortgage and remain in possession of the property.
At FirstFoundation.ca we are in the business of obtaining mortgage loans for borrowers, and are not a mortgage rectification firm. We do encourage those in a temporary financial distress to take action as soon as possible, before going into default with a lender. Before allowing your loan to go into default, contact us to see if other options are available.
If you are interested in learning more about mortgage default, please feel free to contact us today!