During the foreclosure process, it’s easy to feel overwhelmed and out of control. It’s important to know that you have options and that there are actions you can take to help prevent foreclosure or at least buy yourself some time to figure out your next move. Here’s what happens during foreclosures, the foreclosure process, and what you can do if your house is being foreclosed on.
What Is A Foreclosure?
The foreclosure process is the legal right for a mortgage holder or third-party lien holder to take over the ownership of property or sell the property in order to repay the mortgage if the mortgage or lien is in default.
Historically, defaulting on a mortgage resulted in the automatic ownership of the property by the holder of the mortgage (usually referred to as the mortgagee). However, in the course of history, laws were developed to allow the mortgagor time to pay off the mortgage before their property was taken away. This process in which the property of the defaulting mortgagor is sold to satisfy the mortgage is called foreclosure.
State laws and regulations govern foreclosure in the United States in order to protect both mortgage holders and mortgagors from unfairness and fraud. The basics of foreclosure law remain the same no matter where you live.
Lots of borrowers, who are experiencing financial difficulties, are not aware that some lenders are willing to work with them and offer such modifications as loan modifications. One of the worst things these borrowers can do is ignore their lenders.
The InnerWorkings Of A Foreclosure
Foreclosure is the seizure of a mortgaged property after the borrower fails to repay their loan. This is the typical timeline of a foreclosure.
Missed Payment
The first step is a missed payment. Lenders usually provide you with a 15-day grace period to pay your mortgage past the due date; if you do not make your payment on time, you may be penalized with a late fee, as well as report to the credit bureaus.
Mortgage Default
If you miss mortgage payments, you’re considered in default; some lenders consider you in default after 30 days, while others take into account 15 days of no payment. Your lender determines the default rules.
As a next step, determine whether you have a judicial foreclosure or not. A judicial foreclosure results when there is no “power of sale” in the loan documents, or when the state requires it. a non-judicial foreclosure may take place under a power of sale clause and if permitted by state law. This is usually cheaper and faster than a judicial foreclosure.
Notice Of Default
Mortgage lenders typically notify you through certified mail if they intend to begin foreclosure proceedings after 90 days of missed payments. This is called pre-foreclosure. The nature and timeline of foreclosure proceedings vary by jurisdiction, but they are outlined in your mortgage contract. It is common for default notices to indicate the lender will seek authorization to seize and auction the property in 30 days. Foreclosure authorization can be granted within a week of the lender filing its foreclosure petition in some states, while in others the court reviews the lender’s documents for several months.
Pre-Foreclosure
So long as the foreclosure process is still happening, the borrower can catch up on the mortgage in order to stop the foreclosure. The borrower is still in the home, so it’s not too late to avoid eviction. Rather than give up hope, contact your lender to see if you are eligible for a special payment or relief plan.
Notice Of Sale
If you don’t pay the due sum or work out an arrangement within the stipulated notice period, the lender will sell your property, usually in an auction. This process will usually be preceded by the lender placing an ad in the local newspaper or attaching it to your house. Once the lender is ready, they will auction the home off at a specified date and time.
Leave Residence
As soon as your lender sells the property, you must move out. The amount of time you have to vacate the property varies by state.
Will A Foreclosure Damage Your Credit?
Your credit report will be impacted by a foreclosure, where the entry will remain for seven years before expiring. However, the impact is less severe with time.
The major drawback of a foreclosure is that your credit may be ruined, but it is only one of many issues it can cause:
- Being forced to evacuate your home can be a very traumatic experience for you and your family members.
- Under certain legal conditions, foreclosure could involve preparing various documentation, sitting in court, and being charged additional legal fees.
- In a hurry, you may be limited in your housing options or make choices you will regret later.
The Different Types Of Foreclosure
Anybody holding the mortgage can start foreclosure proceedings at any time after a homeowner defaults on the mortgage. There are a few types of foreclosure in the US. Two are widely used with the rest being options in only a few states.
Judicial foreclosure is the most common type of foreclosure, which can be conducted in every state and is sometimes required. The sale of the mortgaged property under a foreclosure takes place under the supervision of a court, with the proceeds going to pay off the mortgage, other lien holders, and then the mortgagor. When legal action is initiated, all the necessary parties are notified, and after a brief trial, there are usually pleadings and a judicial decision.
In a power of sale foreclosure, the mortgage holder auctions off the property without supervision by a court. Generally, foreclosure by power of sale is a more efficient process than foreclosure by judicial sale. As in most states, proceeds from the foreclosure sale go first to the mortgage holder, then to any other creditors with a security interest in the property, and finally to the owner of the mortgage.
Different Ways To Avoid A Foreclosure
If you cannot make your mortgage payments, you may have to endure the shame of foreclosure, but it’s not definite. Decisive action — no matter how anxiety-inducing and exhausting — may help you avoid the larger pains, expenses, and credit harm that foreclosure can cause.
The worst thing to do when faced with foreclosure is to ignore the communications from your mortgage lender. The lender will send messages to the recipient of the message via phone, email, and snail mail.
A conversation with the lender, as uncomfortable as it may be, may result in an arrangement that keeps you in your home. Regardless of the result, if you work with your lender, it may be possible to come up with a more favorable arrangement than foreclosure. Some of these other possibilities include the following.
Loan Forbearance
If you cannot pay your mortgage due to a temporary decrease in income or an income drop, forbearance could be the answer. You will need to discuss it with the lender and you must be prepared to pay back the money owed before the grace period is up. In order to handle this issue, ask for it before you’ve missed any payments or before you skip a payment.
Mortgage Modification
A mortgage lender may consider reducing your monthly payments if your household income has fallen, but you have a stable source of income. Generally, lenders require proof that you will be able to pay your loan back, so applying for a loan modification works similarly to applying for a new loan. In general, modified mortgage terms result in more payments left on the loan, which leads to higher interest costs.
Selling Your Home
If your house is worth more than what you owe on the mortgage, you can sell it and use the money to find a new place to live. You won’t have much time, so you may not be able to make improvements to the house, but make sure you present it in the best possible light (a real estate agent might be able to help you with this). You’ll need to sell a property fast if the real estate market is hot, but if the market is slow or the property needs some fixing up, you may need to cut the sale price in order to make a sale happen.
A short sale may be possible if you owe more than the value of your home, in which case your lender will agree to let you sell your home for less than what you owe. The lender will take all the proceeds from the sale, but you may still have to pay some or all of the remaining mortgage balance. When you decide to pursue this option, seek advice from a real estate lawyer who can help you negotiate the best terms.
Deed In Lieu Of Foreclosure
In a deed in lieu of a foreclosure agreement, you work out terms to turn over the property to your mortgage lender and leave the property in exchange for them dismissing your mortgage. The end result is the same as foreclosure—you have to leave the house—but you and the lender are spared the cost of court proceedings, and you may be able to negotiate a time period in which you can stay in the house to make other arrangements. Though it will hurt your credit, it’s still possible to sell your home at a significant loss. Always consult a lawyer and accountant if you choose this route because you could end up owing the lender money and paying income tax on the part of your debt that is forgiven.
Thinking Of A Foreclosure Sale Or Purchase?
Homes in foreclosure and those taken back by banks are often very tempting for bargain hunters and people who see them as an investment opportunity. However, bidding for these properties can be a gamble, as they typically require significant work and repairs. The sellability of these properties is even less if they have been unoccupied for months or even years.
If you take into account the competition from seasoned investors who come prepared to pay cash and who know the market well enough to spot the best properties, it becomes apparent that purchasing a foreclosure can be particularly challenging for first-time homebuyers.
The purchasing of foreclosure can still be a great opportunity if you are willing and able to do some rehabilitation to get the place ready to resell or if you are willing to move in yourself. Taking a chance on a foreclosure could even help you afford a home if your credit is not perfect. In this case, it’d be wise to consult a real estate professional experienced in foreclosures. Engaging a real estate agent or attorney for advice could spare you costly mistakes.
Final Remarks: The Foreclosure Process
A foreclosure is a stressful event that neither a homeowner nor a mortgage lender wants to experience. By working together, borrowers and lenders can often find a better alternative to foreclosure. When foreclosure is unavoidable, the impact on your credit and your self-esteem can be significant, but both will improve with time.
You should keep an eye on your credit throughout the foreclosure process and afterward as well. Once the foreclosure process is complete, you can rebuild your credit to ensure a smooth transition back to borrowing in the future. Your credit will be impacted by foreclosure for seven years, and maintaining good credit habits will help you make sure your scores eventually improve.
It also may be helpful to find a real estate lawyer that can help you navigate the foreclosure process. This way, it can remove some of the headaches and help to prevent costly mistakes.
