What Is Foreclosure and How Does It Work?
While the dream of home ownership has become easier for many, staying in that home may not always be so easy.
You work hard and save to purchase that perfect home, but due to unforeseen circumstances, you can no longer afford your monthly bills, including your mortgage payment. As a result, foreclosure seems like a very real possibility on the horizon.
First and foremost, you’re hardly alone. Millions of American homeowners face foreclosure every year. While this may not provide you with much comfort considering your situation, at the very least it will help you understand that many people go through something similar.
This article will cover what a foreclosure is, the steps you will have to follow in the event of a foreclosure, and then what you should do and not do during the foreclosure process.
By the end of reading this article, you will have gained a firm understanding of what foreclosure is, what it isn’t, and what you can expect to happen during the foreclosure process.
What Is A Foreclosure?
There may be a time where you cannot make a payment or two, but you can catch up later. Of course, that would be the ideal situation. The real issue happens when you cannot make your mortgage payments for an extended length of time.
You may not be prepared for any period without an income, and you have no savings. If you are not able to sell any of your goods, then you are faced with the ugly reality of a possible foreclosure.
A foreclosure is when the lender or bank takes possession of your home. This means, in a nutshell, that you have lost your home.
A foreclosure happens because the bank tries to recoup all of their loss. The lender can also charge you for the bank costs, and you would be responsible for the difference between the sale and the money that is owed on the mortgage. This can make things all the more difficult if you owe more money than your home is worth. This is called being underwater. Having an underwater mortgage is horrible, but hope still exists.
If you do go through a foreclosure, it can make life reasonably tricky. Unless you are fully living off the grid, you will probably need to have a credit check for various reasons, such as getting a job or buying a new home. Having a foreclosure on your credit report can make these things difficult.
It would be best if you never were late on your mortgage payment to make sure you never run into an issue. What happens if you are though?
Depending on the bank and your state, you have 90-days to be able to get caught up again. If you are unable to get caught up, you will get a Notice of Default from your bank. This is the first step for a past due mortgage. The bank does not want to foreclose on your home, and it would be a hassle for them also. This pre-foreclosure period gives you a chance to get caught up with your payments.
A full foreclosure can take a year or more. The bank has too many of their own steps to go through to foreclose on your home. They have to provide notice, go to court, give you warnings, and give you a chance to get caught up on all of your payments. If you are not able to do so, your home will be set up to be auctioned off. So before that happens, the sheriff may have to escort you from your home. Not only are you losing your home in a foreclosure, but you can also lose your dignity.
What Happens When You Fall Behind On Mortgage Payments?
While the official process of foreclosure does vary from one state to the next, the basic process will remain the same, as the differences between states are relatively minor.
The first step that will possibly lead to a foreclosure is you, the homeowner, miss your monthly mortgage payments. While simply missing your payments does not make a foreclosure a certainty, it does make it a possibility.
This is because many homeowners who fall behind on a payment will catch up to it later. Banks are also fully aware of this, which is why they will offer incentives to get back on track.
For example, they may offer you a reinstatement, which is where you can pay a single payment to cover your previous monthly payments.
Alternatively, they may offer you forbearance, which is where they will take the amount that you owe and spread them out over a new monthly payment plan. This option should be less of a financial burden on you than the reinstatement.
The point that you need to take here is this: just because you’ve been falling behind on monthly payments does not mean that home foreclosure is in your future. You definitely are in the middle of a significant setback financially, and you need to take responsibility over it to fix the problem, but a foreclosure is hardly a certainty in this scenario.
And remember, banks don’t want to foreclosure on your home simply because it’s expensive for them. They will want to work with you to find a solution as an alternative to foreclosure.
The Process of Foreclosure
When you do fall behind on making your mortgage payment, you’ll receive letters from the lender called a ‘notice of default.’
The term ‘default,’ in this context, means that you have not been meeting your financial obligations.
When you receive this letter, it is the official first step in the process of foreclosure, and will be sent within sixty days of you failing to meet the payment deadline. Some lenders will sent it within thirty days.
When you receive this letter, what you need to do is contact the loss mitigation department of your lender and explain the situation to them. You can then hopefully work to find a solution using either of the options that were discussed above. You may even be able to negotiate new loan terms.
But if you continue to fail to follow through on the loan, the lender will then file paperwork to foreclose your house.
In this scenario, it’s important to note the differences between judicial and non-judicial states.
A judicial state is where courts are involved very heavily in the foreclosure process. Examples include Illinois and New Mexico.
A non-judicial state is where the bank can move forward on the foreclosure without receiving approval from the court. This is because the deed of trust will include a Power of Sale Clause that allows the lender to sell the property without having to go to court. Examples of non-judicial states include Tennessee and Michigan.
That being said, the laws concerning foreclosure do vary from state-to-state, so it’s important for you to carefully research the specific foreclosure laws for the state in which you reside, and contact an attorney if you are in danger of foreclosure.
Eventually, after filing the paperwork and after you continue to default on the loan, the lender will proceed to foreclose on your house. As we discussed previously, this means that they will take possession of the mortgage property.
Afterwards, a foreclosure auction or sale will occur, because the bank will want to sell the home as quickly as they can. Almost always, a foreclosed house will be auctioned or sold at below the market value. It’s for this reason that real estate investors will often opt to purchase foreclosed homes, in order to quickly make money from their investment.
What Should You Do During A Foreclosure?
The main thing to remember, as we mentioned previously, is that the bank does not want to take your home. They will have to go through a lengthy process to get the house back, and it can be costly for them also.
Before you get too far into the process, you should contact the bank and see if you can work out a payment plan. Your credit rating might take a hit, but the important thing is that you can save your home.
Banks are not in the business of taking homes and losing money. They want to make money, just like many of you. Do not just ignore calls and mail from the bank.
It is critical for you to work with them. If you work with them, they are more willing to work with you. Every state has their own laws on foreclosure. Do not just rely on random internet searches. Make sure you look for your information for your state.
One more thing you can consider doing to at least delay the foreclosure process, is to ask your lender for an original note of the mortgage. The idea here is that you can buy yourself time to get caught up on the payments. Don’t consider this step if you know you won’t be able to get caught up.
What Should You Not Do During A Foreclosure?
It has already been alluded to, but the most important thing to NOT do is ignore the entire situation. When you receive that initial notice of default from the bank, the very best thing you can do is respond to it.
Typically, the bank honestly does want to keep your home from being foreclosed on. So, do not ignore the calls and letters that you get. The next thing you should refrain from is just walking away.
Not only would just walking away make future home ownership more difficult, as previously mentioned, if a home is foreclosed on the homeowner would need to pay the difference between the selling price and the money that is owed for the mortgage.
If you walk away, you could owe more money than if you would have stayed in the home a few more years. Home values are on the rise, and working with the bank or a financial advisor could help you stay in your home and sell it for more.
What Can A Bank Do To You?
A bank can take your home from you and leave you destitute. A bank will not just forget about the money that is owed. They will do all that they can to recoup their loss.
They will not only take you to court, but they can garnish your paycheck as well. And not only can they take your hard-earned paycheck, but the courts can also grant the bank the right to intercept your tax return.
Many people rely on this tax return to pay other bills and losing it can cause even more issues for you and your family.
Can Bankruptcy Stop a Foreclosure?
Depending on your particular circumstances, filing bankruptcy may be able to stop a foreclosure. If you are in danger of foreclosure, get in to see a bankruptcy attorney to discuss your options. They will be able to best advise you on what option to take.
Is there any hope for you?
Yes, there is plenty of hope.
Working with the bank is not your only choice. You can speak with a bankruptcy attorney, and they can help walk you through the different processes that exist. They can help you. It is important to remember that your home is an investment.
You can attempt to navigate the entire foreclosure on your own, but you do not have to do so. Many attorneys can walk you through the different ways to save your home. If you want to save the place where you made many memories, do not just give up. A foreclosure is not just a black mark on your credit; it can affect you intrinsically.
If you do not ignore the situation, you can try and save your home. You can make a payment plan that keeps you living in your home, and maybe even pass it on to your children.
You can also sell it for more than what you purchased it for. The most important take away is: do not just walk away and ignore the situation.
A foreclosure might be bad, but the situation is not always helpless like you may be led to believe.
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