Cure Period
A cure period is a specified timeframe granted to a borrower in default to remedy a breach of a loan agreement, typically before the lender can initiate more severe actions like foreclosure or invoke an acceleration clause.
Key Takeaways
- A cure period is a critical window for borrowers to correct a loan default.
- It typically follows a Notice of Default, providing a chance to avoid further legal action.
- Remedying the default within this timeframe can prevent the activation of an acceleration clause and subsequent foreclosure.
- The specific duration and conditions of a cure period are defined in the loan agreement and state laws.
What is a Cure Period?
A cure period represents a contractual or legally mandated timeframe during which a borrower, having entered into a state of loan default, is given the opportunity to rectify the breach. This period is distinct from an immediate foreclosure action, serving as a crucial last chance for the borrower to avoid more severe consequences. It typically commences after the lender issues a Notice of Default, detailing the specific breach and the required actions to remedy it.
How It Works
During the cure period, the borrower must take specific actions to bring the loan back into good standing. This often involves paying all missed payments, late fees, and any associated legal or administrative costs. For non-monetary defaults, such as failing to maintain property insurance, the borrower must provide proof of compliance. Successfully curing the default within the specified time prevents the lender from invoking an acceleration clause, which would demand the entire outstanding loan balance immediately, and halts the foreclosure process.
Practical Example
Consider an investor who owns a rental property with a $300,000 mortgage. Due to unexpected vacancies, they miss two monthly payments of $1,800 each. The lender issues a Notice of Default, informing the investor of a 60-day cure period. To remedy the default, the investor must pay the $3,600 in missed payments plus $200 in late fees and $300 in administrative costs, totaling $4,100, within those 60 days. If the investor secures new tenants and pays the $4,100, the default is cured, and the lender cannot proceed with foreclosure.
Frequently Asked Questions
What happens if a borrower fails to cure the default within the specified period?
If the borrower does not remedy the default within the cure period, the lender can proceed with more aggressive actions. This typically involves invoking the acceleration clause, making the entire outstanding loan balance due immediately, and initiating foreclosure proceedings to seize and sell the property to recover the debt.
Is a cure period always granted in cases of loan default?
While common, a cure period is not universally guaranteed. Its existence and duration depend on the specific terms of the mortgage or deed of trust agreement, as well as state and federal laws governing foreclosure processes. Some loan types or severe breaches might have shorter or no cure periods.
What types of defaults can typically be cured during this period?
Most monetary defaults, such as missed principal and interest payments, property taxes, or insurance premiums, can be cured. Non-monetary defaults, like failing to maintain the property or violating occupancy clauses, can also be remedied by bringing the property or situation into compliance with the loan terms. The Notice of Default will specify the exact nature of the breach and the required corrective actions.