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Foreclosure is the legal procedure through which a lender takes ownership of
a property they have financed from the borrower who is in default of payment.
In order to prevent foreclosure, the first thing you need to do is stop avoiding
the process. When people fall behind on their mortgage payments, more often than
not they quickly turn to avoidance. Foreclosure is easier to prevent before the
formal process is initiated by a bank. Although different states have different
laws and regulations governing foreclosure, one thing is common, it starts with
a 'Notice of Default'. Foreclosures don't happen without a notice. Mortgage
lenders and banks typically allow the homeowner to catch up on the mortgage
payment; homeowners are usually given three months to rectify the problem.
After the third payment is missed, the borrower will receive a letter from a
lender stating the amount is delinquent, and that there are 30 days to bring a
mortgage current. This is called a "Demand Letter" or "Notice to Accelerate". If
homeowner does not pay the specified amount or make some type of arrangements by
the given date, the lender may begin foreclosure proceedings.
The best way to stop foreclosure is to prevent it using loss mitigation.
Loss mitigation is the process of trying to stop a home foreclosure before it
occurs. The loss mitigation process is often better handled by a third party due
to their experience and the ability to deal with the lending company without a
personal attachment to the situation. There are several options when it comes to
loss mitigation and the main focus should be to keep the home owner in their
home. Loan modification, short refinance and forbearance are the main options to
be used to save a house.
If that does not seem like a realistic outcome, every attempt should be made to
help the home owner get the most for their home as they possibly can before a
foreclosure sale takes place. This may include deed-in-lieu of foreclosure or a
short sale if a qualified purchaser can be found.
Foreclosure Consequences
Besides the obvious fact that a home owner will lose his or her place to live,
there are other ramifications that will affect someone facing foreclosure
including emotional and financial burdens:
Losing the home. Foreclosure is a very difficult and emotionally-troubling
process for homeowners and their families. It comes atop of already existing
financial and other problems and has long lasting effects for years to come.
Losing all saved equity and appreciation in the home. Homes increase in value each year (in most cases). The longer a person lives in a home, the more the home's value increases. In many cases the combination of the equity and appreciation can translate into the home owner losing a significant portion of life savings.
Increased taxes. A lender that loses money from the sale of a foreclosed home must report the loss to the IRS. Subsequently, the IRS may require the previous owner to report the lender's loss as income on his or her next tax return and pay taxes on it.
Inability to borrow money in the future. The most serious consequence facing a home owner is the immediate destruction of credit profile. A foreclosure is a serious derogatory item that will label a person as unworthy for credit. It will remains on the credit report for at least 7 years.
Inability to buy a new house for a long time. Current lending guidelines restrict lenders from providing new mortgages to anybody with foreclosure within 24 ' 36 months.
Difficulty to rent an apartment. Landlords are routinely checking credit history for all applicants and have significant restrictions for everybody with bad credit. They could have policies of outright denial of rent or demand significant cash deposits as well as increase in rental fees.
Lawsuits. In many states lender has rights to recover part of the loan that was not repaid by the sale of the property at a public foreclosure sale. When there is a deficient amount realized from a foreclosure sale, the lender can sue the borrower and get a deficiency judgment against all other assets of the borrower, causing the borrower to be personally responsible for repayment of the loan.
Loss of employment, difficulties to find another job. Some employers require their employees to maintain good credit histories. Notification of a foreclosure may be grounds for an employer to fire the person from his or her job.
Increase in insurance premium rates. Insurance companies are routinely use
credit scores to calculate their risks (regardless of insurance type ' including
auto, life, health, etc). Statistically, people who have a poor insurance score
are more likely to file a claim resulting in higher insurance premium.
Deed-in-lieu of foreclosure
Deed-in-lieu of foreclosure is a loss mitigation option with mutual agreement
between lender and borrower, where borrower voluntarily transfers property
(deed) to lender to satisfy a default loan and avoid foreclosure proceedings.
The deed in lieu of foreclosure offers several advantages to both the borrower
and the lender. It immediately releases borrower from most or all of the
personal indebtedness associated with the defaulted loan. The borrower also
avoids the public notoriety of a foreclosure proceeding and may receive more
generous terms compare to formal foreclosure. Lender saves time and money on
foreclosure procedures and preserves a property for a future sale.
Allows to vacate property relatively stress free
Mortgage investor may be willing to take possession of property to satisfy debt
In some cases lender allows to stay in home rent free during period of the REO
sale
Some lenders provide financial incentives to homeowner for an orderly move out
Foreclosure Process
The foreclosure process used depends primarily on whether the state uses
mortgages or deeds of trust for the purchase of real property. Generally, states
that use deeds of trust conduct non-judicial foreclosures; states that use
mortgages conduct judicial foreclosures. The principal difference between the
two is that the judicial procedure requires court action. See your state
information for details.
Non-Judicial Foreclosure
First, at the lender's request, the trustee files (records) a notice of default.
The borrower has three months from the date of recording to cure the default by
paying all the payments due, including the trustee's foreclosure charges and any
unpaid real estate taxes.
If the borrower has not cured the default within three months, the trustee then
records a second notice, a notice of trustee's sale. This notice sets forth the
date for a public auction of the property. The notice of sale must contain a
description of the property, and must be published in a newspaper of general
circulation in the area where the property is located. The notice must appear at
least once a week for 20 days, not more than 7 days apart, and must be posted
publicly in the city where the sale will be held. As a result, the sale is
usually held 21-30 days after the filing of the notice of trustee's sale. The
borrower retains the opportunity to cure the default up to five days before the
actual trustee's sale.
Non-Judicial Foreclosure Facts
Reinstatement period: until 5 days before the sale (the borrower's right to cure
the default before the actual trustee's sale)
Trustee's sale
Notice of sale
The total length of the foreclosure process is approximately four months
(minimum 3 months 21 days).
Steps in a Trustee's Sale
Lender notifies trustee to foreclose
Trustee records notice of default
Reinstatement period (minimum 3 months or up to 5 days before the sale)
Notice of trustee's sale and publication of date, time and place of sale (3
weeks)
Sale is held; highest cash bidder wins
Trustee's deed is given to buyer (sale is final, borrower has no right of
redemption)
Judicial Foreclosure
A judicial foreclosure requires a lawsuit on the part of the lender. The
professional contacts the borrower to try to resolve the default. If the borrower is
unable to pay off the default, the professional files a lis pendens (action pending)
with the court. The lis pendens gives notice to the public that a pending action
has been filed against the borrower. Of the two common methods of foreclosure,
the judicial foreclosure is more costly and time consuming. It may, however,
provide for the recovery of that part of the loan that was not repaid by the
sale of the property at a public foreclosure sale. When there is a deficient
amount realized from a foreclosure sale, the lender can sue the borrower and get
a deficiency judgment against all other assets of the borrower, causing the
borrower to be personally responsible for repayment of the loan.
The judicial foreclosure is conducted by the county sheriff or by a referee
appointed by the court.
The buyer does not get possession of the property, in some states, until the
redemption (borrower's right to pay off defaulted loan after auction sale within
specified time) period is over.
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