What Is A Foreclosure And Can It Be Resolved?
Carey Chesney6-Minute Read
June 19, 2020
Foreclosure can be a scary concept. Most of us immediately think of someone losing their home because of some unfortunate financial circumstances beyond their control. It’s not an ideal situation for sure but understanding the way it works and possible ways to remedy the foreclosure can bring at least some peace of mind. Legally speaking, foreclosure is described as the process by which lenders collect on a secured loan default by taking ownership of and selling the mortgaged property. This is often thought of as a last resort, and usually lending institutions will work with borrowers to try and help get them current on their mortgage payments to avoid disclosure. To put it simply, if a borrower has stopped making their mortgage payments and does not have the ability to start making them, the foreclosure process begins.
When a homeowner stops making payments on their mortgage loan, their lender may begin a foreclosure proceeding, which is a legal process to recover ownership of the house that is collateral for the mortgage loan. First, the lender files a lawsuit on the homeowner who has defaulted on their loan. If the borrower cannot pay the mortgage within a specific timeline ordered by the court, the property goes directly back to the mortgage holder (the lender). This is a high-level summary of what can be a very lengthy and complicated process, so let’s take a deeper dive so you can become more familiar with the intricacies of the process and some of the twists and turns it can take.
The Foreclosure Process, Explained
Lengthy and complicated, sounds fun right?! Actually, this can work in your favor. The process taking a long time means more time to work on getting your financial situation in a better place so you can make your mortgage payments and avoid eviction. On the flip side though, the longer the process goes on without improving your ability to pay, the more it hurts your credit in the long run. The process can be divided into the following sections: missed payments, notice of default, pre-foreclosure, and foreclosure auction. Let's take a closer look at each.
As you know by now, it all begins when you miss paying your mortgage. If you see your ability to pay declining before it actually happens, contact your lender and see what assistance they can give. It’s in both of your best interests to avoid disclosure, so usually they will do what they can to work with you on a better solution. Forbearance – a temporary postponement of mortgage payments – or temporarily reducing the amount you have to pay each month are a couple of the options they might suggest. Also be sure to know your rights. Foreclosure laws and processes vary by state, so familiarize yourself with the specific rules and regulations for your state when the first hint of foreclosure crosses your mind.
Notice of Default
If you tried to work with the lender and you still can't make your payments, the next step is for them to notify you that they’re using the foreclosure process to remedy the situation. Within 3 – 6 months of the first missed payment, the lender will initiate the foreclosure process by notifying you that legal action is beginning. This is called a notice of default or a lis pendens and, depending on where you live, it may be required for the lender to record a public notice – usually with the county recorder – that you have defaulted on your loan. Once the lender files this notice, the preforeclosure period has begun.
If you have made it to this point in the process, it may start to create some serious anxiety about losing your home. All hope is not lost though, as you can still pay off the amount you owe and keep your house. You can also fix things by doing a short sale (more on this later). This period – commonly referred to as a grace period – varies greatly in length, as it can last 30 – 120 days. Be sure to check the specific rules for your state to find out how much time you have during this part of the process to make things right.
If you have entered this phase, the primary focus goes from trying to keep the home to trying to get the most value for it (both for the lender and the borrower). You still have the Right of Redemption, which means if you pay off the amount owed you get to keep your house, but the foreclosure auction allows for the lender to try and get as much of what is owed to them as they can. If there is any left over beyond that amount, it goes to you, the borrower. In many states, these auctions are required to take place in a publicly accessible space, and often occur in front of or inside county courthouses.
When it comes to foreclosures, questions abound! Here is a look at some of the commonly asked questions about this process.
Are There Ways To Stop A Foreclosure?
Yes, definitely. This can often feel like a scary process in the beginning, but there’s hope at many intervals throughout the process. To stop a foreclosure outright and keep your home, you’ll need to pay what is owed, but there are other solutions that can protect your credit score, or allow you to stay in the home if a new arrangement can be made between you and your lender. Keep the lines of communication with your lender open, be honest about what you can pay, and often a solution can be agreed upon.
What Is A Short Sale?
A short sale is a transaction by a third party at a price less than that owed on the mortgage, with the sale price going directly to the lender and the third party taking possession of the home. So, let's say you owe $100,000 to your lender on your mortgage. Someone else wants the home, so they offer $75,000. In a short sale – which the lender has to approve – the new buyer pays the lender $75,000 and gets the home. Depending on the details worked out in the short sale, you may still be responsible for paying the difference between the short sale price and the balance of the mortgage owed ($25,000 in this example). If you don't pay, it’s possible you might face legal action from the lender to collect.
What Other Options Might Stop The Foreclosure From Proceeding?
One other option to stop the foreclosure – but not keep your home – is a deed-in-lieu-of foreclosure. This means you voluntarily sign over the deed to your home to the lender and they absolve you of the need to make your payments. Another option that will allow you to stay in your home is a deed-for-lease (also referred as a mortgage-for-lease). In this scenario, you give the deed to your lender and then essentially rent it back from them.
What Happens If No One Buys The Property At Auction?
If no one wants to purchase at a foreclosure auction, the lender takes ownership of the property. It then becomes known as bank-owned property and can be listed and sold on the open market.
What Happens To The Borrower After Foreclosure?
Unfortunately, there are a lot of negative consequences that affect you after a foreclosure. As you may have guessed, it can really hurt your ability to buy a home in the future. Any lender you try and work with in the future knows that you essentially walked away from the previous debt, so they become apprehensive about approving you for a loan. This is also reflected on your credit history for 7 years and will result in a pretty big hit to your credit score. Over time, and with responsible borrowing practices, this can be remedied. Educating yourself on how to buy a home after foreclosure or bankruptcy is critical.
What If I Want To Buy A Foreclosure Property?
Buying a foreclosed property can be a great way to get a lot of bang for your buck, but it doesn't come without possible pitfalls. The best thing to do is find a real estate agent who can offer a lot of experience with these types of properties and understands the difference between buying a foreclosure and a normal sale. A few of the key differences are the need for banks to approve offers, the lack of seller’s disclosures (things the owner needs to tell you are wrong with the home), and an extended timeline for a variety of reasons. Also keep in mind that when you buy a house this way the chances that you will be dealing with a fixer-upper increase quite a bit.
Get Ahead Of Mortgage Payment Issues By Working With Your Lender
Bottom line, the best way to avoid foreclosure is to talk to your lenders immediately if you think you might not be able to make your mortgage payment. If that doesn't work, consult with an attorney to learn more about possible defenses to a foreclosure proceeding. Most of all, create a relationship with a real estate agent you trust who understands real estate market trends and can advise and guide you through this uncertain, but definitely manageable, process. Do you need an agent to buy a house? Not necessarily, but when it comes to foreclosures, it’s a really good idea to consider using one.
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