Technical Default

DEFINITION of 'Technical Default'

A deficiency in a loan agreement that arises not from a failure to make payments as promised, but from a failure to uphold some other aspect of the loan terms. Technical default indicates that the borrower may be in financial trouble, and can trigger an increase in a loan's interest rate, foreclosure or other negative events.

BREAKING DOWN 'Technical Default'

For example, a real estate co-op can go into technical default if it has failed to keep up with building maintenance and repairs, even though the mortgage is paid up. Homeowners with mortgage payments that are current can find themselves in technical default if they fail to pay property taxes or homeowner's insurance premiums. A corporation could go into technical default if it falls short of meeting promised operating ratios, such as the proportion of debt-to-equity, even if it has been making all loan payments as agreed.