A default occurs when a borrower (often the real estate investor in this context) fails to meet the obligations of a loan as specified in the loan agreement or mortgage contract. These obligations typically include making regular payments on time, maintaining insurance, and keeping the property in good condition, among other terms.
There are various types of default in the real estate industry, including:
- Payment default: This is the most common type of default, occurring when a borrower fails to make scheduled loan repayments. If a borrower is unable to pay their mortgage for a certain amount of time (usually stipulated in the loan agreement), the lender may start foreclosure proceedings to recover the outstanding loan amount.
- Technical default: This type of default can occur if a borrower fails to fulfill non-payment-related conditions of the loan agreement. This could include failing to pay property taxes, allowing the property to fall into disrepair, or violating another condition of the loan agreement.
When a default occurs, the lender has the right to take legal action to recover their losses. This often involves foreclosure, a process by which the lender repossesses and potentially sells the property to recoup the unpaid loan balance. The exact legal consequences of a default can vary based on the loan agreement, local regulations, and other factors.