Default means the payer has broken a term of the note or the security instrument and has not put it right within the time those documents allow. A missed payment is the familiar case, though unpaid property taxes, lapsed insurance or a transfer of the property without your consent can count as well if your documents say so.
Your documents write the definition
The note is the payer’s written promise to repay, and the security instrument (a mortgage, deed of trust or land contract) ties that promise to the property. Everything the payer agreed to do is spread across the two, and failing to do one of those things, once any notice and cure period has run, is a default.
Two notes on similar houses can define default differently, because different people drafted them. Look for a section headed “Default”, “Events of default” or “Borrower’s failure to pay”, and read it before assuming anything about your own note.
When the payment is late
A payment default is the payer not paying what is due by the due date, including a balloon, the large final payment some notes require. The note’s own terms decide how serious a late payment is. The grace period is the number of days after the due date during which a payment can still arrive without a late charge. The late charge is the fee the note lets you add once that period has passed. The cure period is the time the payer has, after written notice from you, to catch up before you may take a further step.
A payment that arrives a week after the due date is late, but whether it is a default you can act on turns on those terms and on whatever notice your documents and your state require.
Defaults that involve no missed payment
Security instruments generally oblige the payer to protect the property as well as to pay, and breaking one of those duties is sometimes called a non-monetary default. Examples include:
- Not paying the property taxes. Unpaid taxes can become a lien, a legal claim against the property, that ranks ahead of yours. See what to do when the borrower has not paid the taxes.
- Letting the hazard insurance lapse, which leaves your collateral unprotected.
- Selling or transferring the property without your consent, where the documents contain a due-on-sale clause.
- Letting the property fall into serious disrepair, or allowing another lien to be placed ahead of yours.
An event your documents never mention may fall outside default under your note.
From default to remedy
A default on paper does not hand you the property. In general terms the sequence runs like this:
- The payer misses an obligation and any grace period passes.
- You send written notice that describes the default and what is needed to cure it.
- The cure period runs.
- If the default is still not cured, the documents may let you accelerate, which means calling the whole balance due.
- The remedy can then begin: foreclosure or forfeiture, depending on the instrument and the state.
Notice wording, delivery method and waiting periods come from your documents and from state law, and some states add consumer protections on top. Nothing on this page is legal advice, so have an attorney in the property’s state review the file before a default notice goes out.
How accepting late payments can weaken your position
A holder who takes late payments month after month without comment may later be told by a court that strict due dates were waived. The rules on this differ by state, but what protects you anywhere is a written record of every payment and the date it arrived, plus a written note of any arrangement you make with the payer.
What a default does to the price of the note
A note with a clean record is called performing. One that is seriously behind is non-performing and sells at a deeper discount, meaning a wider gap between the balance owed and the price paid, because the buyer takes on the work and cost of resolving it. One late payment that was caught up weighs far less than a pattern, as the page on whether late payments lower a note’s value explains.
If selling is one of the routes you are weighing, you can ask what the note would bring as it stands, default included, before you spend money on enforcing it.
Read the default section first
Pull out the note and the security instrument, find the default section, and write down the grace period, the late charge and the cure period. If the section leans on a word you have not met, look it up in the note basics hub before you rely on your reading of it.
Set those three figures against your payment record and you will know whether the payer is in default today or only late. Once you know that, the choice between working it out with the payer, enforcing and selling the note instead of foreclosing is one you can make on facts.
Related questions
Is one late payment a default?
It depends on the note. Where the note gives a grace period, or calls for written notice and a chance to catch up, a late payment has to get past those before it is a default you can act on. Read the default section and ask an attorney in the property's state.
Can I still sell a note that is in default?
It can be sold, though to a narrower set of buyers: those who take on notes that are behind. The price is lower than for a note that is paying on time, because the buyer takes on the cost and work of resolving the default.
What does it mean to accelerate a note?
Acceleration means calling the whole remaining balance due at once after an uncured default. It is available only if the note contains an acceleration clause, and your documents and state law govern the notice that has to come first.