When they say the ‘default material’ they mean the “WorldGridMaterial” material on meshes with a currently unset material, like new BSP brushes or a new landscape. The dark placeholder material you see while the shaders are compiling. (Maybe Epic could tweak the FAQ, this is one of the most common prejam misunderstandings)
Yes, you can use character models from Mixamo. Just declare any premade assets when you submit.