Loan Defaults

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If you are going to be a lender, you’ll need to understand how your borrower might come into default and what to do about it.

The first way to default is failing to comply with any term of the note. This includes making a monthly payment or paying off the note when due. Monthly payments can be tricky. Your note needs to be clear about what constitutes just a late payment versus one that causes a default. General mortgage rules give the borrower 15 days from the due date to make payment without penalty. Then, he can make payment up to 30 days with just a late fee. Then, if payment is not made within 30 days, the note is in default.  Remember, however, that your note can modify any of those payment terms! You just need to know what those terms are. Your note should also be clear on the exact day the note is due.

Also, default can occur under ANY term of the note or deed. Your documents should include that maintaining property insurance and the payment of property taxes are both required or it will result in default. Your note may have other terms as well, such as not putting any other lien on the property. The key here is to really understand your note and deed. This is why you should have and provide your own loan documents that cover all the terms you require. You won’t get this from a title company.

Your note should have default terms, such as any penalties or higher “default” interest rate. This provides greater incentive for your borrower to not just let the loan go into default. If default occurs, you should immediately initiate the foreclosure process. That can take time, but during which you resolve the problem.

First, you can step in and help the borrower complete the project, maybe in exchange for some of the profit. Or, you can renegotiate the terms by modifying the note, such as extending the deadline for extra fees or interest. This should be done in writing and signed. Further, you can negotiate a “deed in lieu.” This is when the borrower gives title to the property back to the lender in exchange for relieving the debt. This avoids foreclosure in a simple, quick way.

In the next blog, we will discuss what happens if you must go into foreclosure.

 

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180



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