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What happens if a project loan defaults?
What happens if a project loan defaults?
Korin Hedlund avatar
Written by Korin Hedlund
Updated over a week ago

If a project loan defaults, here's what happens:

There's usually a 5-10 day grace period for the borrower to make the missed payment without penalties. If they miss this, a late fee is charged. If the loan is still unpaid after the grace period (typically after 30 days), the lender issues a notice of default. Then, a demand letter is sent requesting full repayment, including penalties and interest.

During the pre-foreclosure period, the borrower can still make payments to bring the loan current or seek a loan modification. If the default isn't resolved, the lender may require full repayment of the loan balance immediately.

Foreclosure can be judicial or nonjudicial. In judicial foreclosure, the lender files a lawsuit, and if the court rules in their favor, the property is sold at a public auction. If the auction doesn't cover the outstanding balance, the lender might get a deficiency judgment for the remainder. Some states allow a redemption period after the auction for the borrower to reclaim the property.

In nonjudicial foreclosure, the lender forecloses without court intervention using a power of sale clause. They post and send a notice of sale, and the property is auctioned. A right of redemption period is less common but possible in some states.

Given these steps, there are risks that dividends could drop if a borrower defaults and loan reserves can't cover them, which is why our goal is to partner with experienced and creditworthy borrowers to mitigate borrower-related risks as much as possible.

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