The Foreclosure Process Explained
Generally, owning a house is something that people take pride in. Apart from having a place to live in, it’s an investment that can sustain your family and descendants for many generations to come. However, if your house is under mortgage because you failed to make timely payments, you may have to face the risk of foreclosure—or losing all your property rights and getting evicted from your house.
If you’re not familiar with this legal process, keep reading to learn more about foreclosure and how it works.
What Is Foreclosure?
In its simplest definition, foreclosure is a legal process that allows the lender to redeem the money on a defaulted loan by taking and selling the house of the borrower. This means that the borrower is not capable of paying the mortgage due to many unforeseen circumstances. Examples of such events may include unemployment, excessive debts, medical emergencies, death, divorce, natural disasters, and many more.
Once the lender forecloses the property, they’ll sell the same and use the proceeds to take back the money they’ve lost from the borrower. However, while foreclosure is considered a common remedy for lenders to recover the amount owed to them, it’s important to note that this process varies from one state to another. Thus, it is a smart move to research the laws and regulations applicable to your state before dealing with foreclosure.
Learning about the foreclosure process involves familiarity with its pros and cons. The more you know about this, the more you can assess more effectively whether it’s a good financial solution for you and your family—if you’re the borrower in this case. The following are the reasons why foreclosure can be beneficial (or not) for your situation:
Pros For Foreclosure
Once your lender starts the foreclosure process, you no longer need to make mortgage payments. This can help you save some money in the future. This is especially true if your mortgage loan is more than what you can actually afford at the moment. It is also worth noting that the foreclosure process will still proceed unless you pay the total amount of your debts. Thus, if your financial standing doesn’t allow you to make timely payments, foreclosure is a great recourse so you can save money in the long run.
A Fresh Start
Despite losing your home in the foreclosure process, this gives you an opportunity to start anew by moving to a new neighborhood with improved amenities and welcoming neighbors. Also, foreclosure will allow you to re-examine your priorities and choose to live a happier and healthier lifestyle. You learned your lesson that some things are not worth stressing over and that letting go of your property is probably one of the best decisions you’ve ever made.
Cons Of Foreclosure
Damaged Credit Score
This is one of the common drawbacks of facing a foreclosure. Typically, this process can drop your credit score by at least 100 points. The foreclosure will also be recorded in your credit report for several years, which can impact your eligibility to take out other loans.
Deal With Deficiency Judgment
Your lender may agree to a short sale or a deed-in-lieu of the foreclosure. Although you succeeded in stopping the foreclosure process, there’ll still be remaining amounts on the mortgage that these options can’t cover. This is commonly called a deficiency judgment, filed by the lender against you in court. Unfortunately, this situation can be quite challenging as you’re already in financial distress, making you unable to cover these judgments.
There is no fixed formula in determining whether foreclosure is beneficial or not. It's important to consider the gravity of your situation before making a decision. However, if you think foreclosure is not a viable financial solution, options like selling your house for cash is also an excellent idea.
You can work with reliable cash home buyers to walk you through the process. They can also buy and sell houses that are about to be foreclosed, making it easier for you to let go of problems on your hands.
What Are The Stages Of Foreclosure?
Now that you know what foreclosure is all about, including its pros and cons, the next step is to familiarize yourself with the common stages of this legal process.
Default Mortgage Payments
Generally, a payment default occurs when you fail to make at least one mortgage payment. In most cases, your lender will send a notice, informing you that they haven’t received your monthly payment. They will also give you a grace period of 15 days to settle your obligations without additional fees. However, your failure to pay the mortgage for the month can result in late fee charges. In this case, you will also receive a missed payment notice.
When you miss at least two payments, your lender will send a demand letter which is a more urgent notice, informing you that you’re in default for your mortgage payments.
Notice Of Default
If you miss making mortgage payments for three to six months, your lender will record a public notice to the County Recorder’s Office. This notice is also called a Notice of Default (NOD). Basically, a Notice of Default refers to written notification to the homeowner that the lender will file a suit if the former fails to pay the outstanding mortgage debts. After posting said notice, you’re given 90 days to pay the recent bill and reinstate the loan.
After recording the public notice, the pre-foreclosure stage begins and you’re given several options to avoid eviction. These options include:
- Paying The Outstanding Balance – If you have enough money to fully pay the outstanding balance, this is the most convenient option. This will give you peace of mind, knowing that you can reverse the default, retake the ownership of your house, and avoid getting evicted.
- Entering Into A Short Sale – This refers to the voluntary sale of the house even before the foreclosure begins. However, before you enter into a short sale, you should understand that the sales price is usually less than the total amount of money you owe to the lender. A short sale is beneficial because it’s less damaging to homeowners like you. Moreover, it can help your lender recover their money as soon as possible without paying the expensive fees involved in the foreclosure process.
On the other hand, if the sale price is more than the amount of your debt, you’ll be able to keep whatever is left after paying off the mortgage. If you want a short sale to work for you, make sure to follow some tips to help you sell your house faster.
- Signing A Deed-In-Lieu Of Foreclosure – Under this transaction, you as the homeowner will voluntarily sign the deed over to the lender for you to be released of all mortgage obligations. However, your lender will only approve a deed-in-lieu of foreclosure once you fail to sell your house in a short sale and if there are no liens on your property.
In the same event that you can’t sell your property in a short sale, repay the outstanding balance in full, or sign a deed-in-lieu of foreclosure, your house will go through a public auction. This auction will be open to the public—held in a conference room, convention center, county courthouse, or even online. Before the auction starts, a notice will be given to the homeowner, specifying the date, time, location, and process involved.
During the auction proper, the bid will be set to the outstanding balance of the mortgage loan. The highest bidder will get the property after the necessary payment and other procedures mandated by law. They may have the option to pay the cash in full or a specific amount for the deposit.
However, despite the auction, the highest bidder may not automatically take ownership of the property since the previous homeowner possesses the right of redemption. This refers to your right to repurchase your house after being sold at an auction within a specified period. In most cases, you have to pay the sale price or the full loan balance, plus interests and costs, before you can restore your property rights. Therefore, if you want to exercise your right of redemption, read about your state laws, particularly on the relevant provisions, so you don’t miss anything in the process.
If your property isn’t sold at the auction, it becomes a bank-owned property. This is known as the post-foreclosure stage. Your lender will try to sell the property through a broker or an asset manager to get their money back. To ensure that the property is sold quickly, they’ll remove the liens attached to the property.
With all of these in mind, it is safe to say that the foreclosure process is indeed time-consuming. Therefore, if you’re bound to face this legal process, learning about it will help you know some recourses or remedies to avoid or mitigate it. In case you need help, hiring a reliable foreclosure attorney is also a good idea. Your attorney will help you understand this complicated process without the risks of losing more in the proceedings.
Additional Real Estate Resources
Debbie Drummond has written a great resource about buying a home after a foreclosure. It's important to follow certain steps to repair your buying power and you can find them all in her article.
Eric Jeanette has a great post about getting a mortgage after foreclosure. Learn about how long you have to wait after a foreclosure to get a loan and what to do to make it happen faster.