Q & A: Why Did I Get a Notice of Default on the Mortgage?

It’s that time of year again. Mortgage holders’ bank accounts face extra stress in many households. The 2024 tax bills are now due. So are estimated 2025 taxes for small business owners. When taxes are done, what if insufficient funds remain for the mortgage payment?

Mortgage lenders send a notice of default (a.k.a. notice of foreclosure) to a borrower who’s behind with monthly payments. Notices of default tell the borrower what needs to be done to bring the payments up to date — and how soon that must happen. In blunt terms, a default notice tells the borrower: Catch up quick, or we could foreclose.

Here’s the gist of what borrowers need to know about the notice of default.

Q. When Do Mortgage Companies Issue These Notices?

A. 120 days after the mortgage payment doesn’t arrive.

When the borrower is 45 days behind in paying, the mortgage company contacts the borrower to find out what’s going on. Initial contact is not a notice of default. At this time, the borrower might be able to get the company to work out a plan.

It’s important to ask ahead of time, though. If the borrower asks for a loan modification, or, alternatively, for permission for a short sale, the mortgage status goes into pause mode. The mortgage company considers the request and makes a decision.

A person who has equity in the home and receives a valid default notice might want to put the home on the market. In a short sale, the borrower loses the home, but this is less damaging to a credit profile than foreclosure is.

Under federal law, a lender may not issue a default notice and start the foreclosure process until the borrower is 120 days behind.  

Note that each state’s law also comes into play. Take California, where the law says:

• Lenders must contact a borrower who is behind in payments at least 30 days before sending a notice of default and beginning the process of taking the deed.

• Once the default notice goes out, the borrower has three months to catch up on all payments.

• Unless the borrower can make that full payment, the lender may record a notice of sale, stating that the home will be auctioned in 21 days.  

Concerned borrowers need to find out what their states require, and when.

Q. What Is Loss Mitigation?

A. If the borrower doesn’t respond or doesn’t pay up in time, the foreclosure process looms. Banks aren’t eager to foreclose. They prefer to keep receiving payments with interest. That’s why they work out arrangements with struggling borrowers — to “mitigate” their losses.  

If a struggling borrower makes an SOS call to the company, the representative on the line typically redirects that borrower to the lender’s loss mitigation department. The borrower’s relief options could include:

• A repayment plan. This means paying back the overdue amount on a schedule.

• Forbearance. If the borrower faces a job loss or a one-off financial setback, forbearance could be available. This puts the mortgage on hold (or allows for lower payments) for a given period, until the borrower gets back on firm financial footing.

• A loan modification. If financial hardship will continue for an extended time, a mortgage company could decide to assist by extending the terms of the loan, or possibly even modifying the interest charges.

If a lender offers one of the above possibilities, a deed holder could catch a break in return for holding onto the home and the debt.

Q. When the Deed Holder Sells the Home, Could That Trigger a Default Notice?

A. A mortgage loan has a due-on-sale clause. A deed transfer triggers that clause. So, the due-on-sale clause comes into play when you sell a home.

Due-on-sale clauses create a situation where a full loan payoff is immediately required. While this isn’t common, it’s possible that a lender’s data system would flag a home as defaulting when the owner transfers the deed. Just be aware that you can’t transfer your deed before you have arranged:

• A lender-approved assumption of the mortgage by your deed recipient; or
• Full and final payoff of the mortgage loan.

Word to the wise. Unless your loan is assumable, be sure you get your mortgage company’s go-ahead to transfer your deed. Confirm that the lender knows you are using your sale proceeds for your final payoff. Otherwise, you could be placing yourself at risk of a foreclosure-related stink bomb on your credit report.

Q. What If I Got a Notice of Default on the Former Deed Holder’s Mortgage?

A. Call the lender. Use caution, in case you’re receiving a scam notice. Don’t use the phone number written on a letter or text message.  

Call the title company that handled your settlement also. It is the title company’s role to make sure you get a clear title at closing. If the seller paid the loan off, but the funds were not properly applied to the seller’s mortgage account, the title company can get to the root of the mistake.

Your lender has protection for your good title, with title insurance. You paid for the lender’s title insurance at closing. The title company should defend the deed for your lender and resolve the previous balance.  

Are you protected from claims on your title after closing? An owner’s title insurance policy can prove useful if a legal action arises against the policy holder.

In a worst-case scenario, a former deed holder’s mortgage lender with lien priority could attempt to foreclose. Preserve your credit and your good title. It’s a good move to speak to a lawyer in the rare case that an unexpected mortgage lien turns up in the records. You or your lawyer can call the insurance department if the title company is not fulfilling its role in compliance with state standards. Each state has its own enforcement bureau.

Conclusion

If you’re ever feeling stressed about your ability to make a mortgage payment, it’s best to be proactive. Work with the company to understand your options, and act. To avoid credit profile damage, challenge the notice immediately if it appears to be a mistake.

It’s not helpful to wait and see if things will get worse or better. Once a mortgage company issues a default notice on a loan, the lender could gain control of the deed within just weeks.

Important notes: Neither this website nor any other can provide case-specific legal or financial advice. Consult a lawyer if you are facing legal action over a mortgage debt. Deeds.com is not a financial adviser. Please use this article as a general orientation, not state-specific or situation-specific legal or financial advice.