What does foreclosure mean and how do you avoid it?
As a homeowner, it’s important to understand what happens if you fail to make your monthly mortgage payments. Grace periods vary by lender, but eventually, your lender will have the option to initiate the foreclosure process. Understanding what it is and how it works can help you avoid losing your home and mitigate long-term damage to your credit.
Foreclosure, a definition
Foreclosure is the legal process a homeowner and lender go through if the homeowner fails to make monthly payments on a home or other piece of real estate in a timely manner. Because the home acts as collateral for a mortgage, the end result of the foreclosure process could be the lender taking possession of the home and selling it to pay off the balance of the loan.
The good news? Lenders may prefer not to go through foreclosure if another option is available.
Judicial vs. non-judicial foreclosure
A judicial foreclosure requires the lender to go to court to foreclose on a home, while a non-judicial foreclosure allows the lender to foreclose without requiring a judicial decision. According to Nolo, while a homeowner can request a judicial foreclosure in any state, it’s only required in:ec-nolo-judicial-nonjudicial-foreclosures
- Connecticut
- Delaware
- Florida
- Hawaii
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- New Jersey
- New Mexico
- New York
- North Dakota
- Ohio
- Oklahoma
- Pennsylvania
- South Carolina
- Vermont
- Washington, D.C
- Wisconsin
What is the foreclosure process?
To foreclose on a property, lenders are required to go through an extensive process before they can claim legal ownership of a home. This process is intended to give the homeowner the opportunity to either make their payments or negotiate another option with their lender.
The foreclosure process varies from state to state, so the rules that apply in New York may not apply in Texas or Arizona. However, here are some general steps to give an idea of the process.
Pre-foreclosure
According to the Consumer Financial Protection Bureau (PDF) (CFPB), a loan must be more than 120 days delinquent before a lender can begin foreclosure proceedings.ec-consumerfinance-foreclosure-avoidance This is sometimes referred to as the pre-foreclosure period. During this time, the lender may reach out to the homeowner via mail or phone to remind them about their missed payments and encourage them to make contact to resolve any outstanding mortgage debt.
Notice of default
Once the initial waiting period has passed, lenders can file a legal complaint or a notice of mortgage default. While the specifics will vary by state, homeowners who receive a notice of default can still negotiate an agreement with their lender after being notified.
Eviction
If a homeowner fails to reach an agreement with their lender, they may be served with an eviction notice. The amount of time a lender has to evict a homeowner depends on state laws, but could range from a few days to close to a month.ec-nolo-eviction-state-laws If the homeowner refuses to vacate the property after the eviction notice has been served, the lender can take legal action against the homeowner and repossess the property.
The lender can then sell the property to repay the remaining balance on the mortgage loan. If there’s any money left over, the lender is required to refund it.
Methods for avoiding foreclosure
Generally speaking, neither lenders nor homeowners want to go through the entire foreclosure process. Instead, most lenders will offer homeowners different options to help them stay on track with their mortgage payments and keep their loans in good standing.
Forbearance
With loan forbearance, a homeowner can ask their lender for a temporary pause or reduction of their mortgage payments. This doesn’t erase the debt, but it may provide the homeowner with necessary breathing room. Once the forbearance period ends, the homeowner and the lender will need to agree to a repayment plan, deferral or loan modification.
Reinstatement
If a homeowner is behind on their payments, they may be able to request a mortgage reinstatement if they meet lender requirements. This allows them to make a lump-sum payment to cover the balance of what they owe, plus any fees. Once this has been done, the notice of default is lifted and the homeowner can resume regular mortgage payments.
Refinance or modification
If a homeowner is having trouble making their payments, the lender may be willing to renegotiate the terms of the loan to make the monthly payment more affordable. Lenders may do this by offering to lower the interest rate or extend the repayment period. This may involve modifying the terms of the existing mortgage or refinancing to create a new mortgage. It’s important to be proactive with this option as you may not be able to qualify for refinancing with missed payments on your mortgage.
Short sale
It’s possible for homeowners to find themselves in a position where they owe more on the mortgage than the value of the home. This is known as being underwater on your mortgage. Accumulated interest from missed payments can lead to this, or property values could decline due to market volatility.
Regardless of the cause, a lender might be open to the option of a short sale. With a short sale, the lender agrees to allow the homeowner to sell the home for less than the current mortgage balance and use the proceeds to repay the lender. While this may be a net loss for the lender, they may determine this is more cost-effective than going through the entire foreclosure process. However, short sales require lender approval, and the homeowner may still be responsible for the deficiency balance depending on state laws and lender policies.
Deed in lieu of foreclosure
If a homeowner is unable to sell their home, they may voluntarily offer a deed in lieu of foreclosure, or to sign the deed over to the lender. The lender can then take possession of the home and sell it to pay off the current mortgage balance. This has the same effect as a foreclosure, but streamlines the process.
Long-term effects of foreclosure
Even if you’re able to make an arrangement with your lender to prevent eviction, going through the foreclosure process can have a negative impact on your financial health, such as:
- Loss of your home: Foreclosure can lead to the potential loss of your home and any equity you may have built.
- Additional costs: If your lender begins foreclosure proceedings on your home, you may be faced with legal expenses, fines and emergency moving expenses if you’re evicted.
- Lower credit score: Even if you’re able to negotiate a settlement with your lender, a foreclosure can stay on your credit report for up to seven years. Not only does this make it harder to get approved for a loan in the future, but Experian® notes that it may prevent you from getting a new mortgage for several years.ec-experian-foreclosure
In summary
You could be at risk of foreclosure if you find you’re falling behind on your mortgage. That’s why it’s important to communicate with your lender if you’re facing financial issues that could affect your ability to make on-time payments. In most cases, your lender will be willing to work with you to avoid foreclosure, so you can continue to pay your mortgage and stay in your home.
What is foreclosure? FAQs
What should I do if I receive a foreclosure notice in error?
The first thing you should do is contact your lender to see if you can resolve the issue. Once the issue has been resolved, ask the lender to remove the foreclosure notice from your credit report. You may also need to send dispute letters to the major credit bureaus, requesting they remove the foreclosure.
What are foreclosure or mortgage loan modification scams?
Any mortgage modification agreement should be made by you and your lender. Most third-party modification offers or offers to protect you from foreclosure are scams and should be reported to your state’s attorney general and the Better Business Bureau.
Where can I find legal assistance to fight a foreclosure?
If you need legal assistance during foreclosure, you should work with a trusted attorney. You can also find Foreclosure Avoidance Counselors through the U.S. Department of Housing and Urban Development (HUD).ec-hud-housing-counselor
