In some states, the notice of default is attached to the home, often on the front window or door. If you have received a notice of default, or are worried you might, keep reading to learn how you can handle it before it’s too late.
Federal Foreclosure Laws and Notice of Default
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 mortgage payment. Foreclosures cannot begin in earnest before a person is more than 120 days late.
Extra Steps for States With Notices 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 records a Notice of Sale, which says that the lender will sell your home at auction in 21 days. During this time, the only way a homeowner can stop foreclosure is to pay off the mortgage in full. After 21 days, the lender may sell the home to the highest bidder at the auction. If no good bid is received, the trustee then conveys the home to the lender.
Notice of Default and the Short Sale
Federal law does not allow for dual tracking, which is the process of moving toward taking the home while a homeowner is trying to sell the house in a short sale or while they’re working on other options. When a person applies for a short sale or loan modification, the foreclosure process is paused until the request is viewed. 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.
The Bottom Line
No one should be taken by surprise by a notice of default. It may be the formal start of the process of losing your home, 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.
