1. What Is a Default?

A borrower defaults when they fail to meet the terms of the loan—usually by missing payments, violating contract terms, or failing to repay by the agreed deadline2.

• Defaults can happen on secured loans (like real estate-backed deals) or unsecured loans
• Most lenders allow a grace period before declaring default
• Once in default, legal remedies become available to the lender

2. What Happens in a Real Estate-Backed Loan Default?

If your loan is secured by property (via a deed of trust or mortgage), you have legal rights to recover your funds:

• Foreclosure: You may initiate foreclosure to take possession of the property
  • Non-judicial foreclosure: Faster, used in many states with power-of-sale clauses
  • Judicial foreclosure: Court-supervised, used in states without power-of-sale clauses
• Property sale: The asset is auctioned or sold to repay the loan
• REO (Real Estate Owned): If no buyer emerges, the lender may take ownership

3. Can You Pursue a Deficiency Judgment?

If the sale of the property doesn’t cover the full loan amount:

• You may be able to sue the borrower for the remaining balance
• This depends on state law and the terms of your loan agreement
• If allowed, you can pursue wage garnishment or asset seizure through court

4. Consequences for the Borrower

Defaulting can have serious long-term effects:

• Credit score damage (can last up to 7 years)
• Legal action and potential lawsuits
• Loss of property through foreclosure
• Difficulty securing future loans or housing2

5. How Lenders Can Protect Themselves

Smart lenders prepare for the worst—before it happens:

• Use secured loans with clear collateral
• Work with title companies or attorneys for proper documentation
• Include power-of-sale clauses and default remedies in contracts
• Require borrower equity (low LTV) to reduce risk
• Maintain communication and monitor project progress

Coaching Tip

Default doesn’t mean disaster—if you’re prepared. The key is strong underwriting, clear terms, and knowing your legal options.