What You Need to Know About Foreclosure
Foreclosures continue to be something of concern in the United States. While 24% lower than last year at this time, foreclosures still affect nearly 1 in every 1,500 homes.* People do not plan to have their home foreclosed on, but it is a viable option in certain situations In this course, we will take a look at the following regarding foreclosures:
We will take a look at each of these areas throughout this course. By clicking on each bullet above you can go directly to each section. Or, simply continue through this course to learn more.
The definition of “foreclosure” is to “shut out, to bar, to extinguish a mortgagor’s right of redeeming a mortgaged estate.” In simpler terms, it is the termination of all rights of the homeowner covered by a mortgage. It is the process when the mortgage becomes the “absolute property” of the lender. Foreclosure threatens any homeowner who is late or seriously behind on their mortgage payments.
The foreclosure process differs from state to state, but we will provide you with general information about the foreclosure process. Foreclosure typically begins when homeowners fail to make payments on their mortgage on time. In most instances, after three missed payments, you will receive a demand for payment, which is usually a letter issued from the lender or the court; this is referred to as a Notice of Default (NOD).
Once the NOD is served, it really depends on the state you live in as to what comes next. At this point, a lender will usually begin the formal foreclosure process in one of two ways:
- Judicial Sale, which requires that the process go through the court system, or
- Power of Sale, which can be carried out entirely by the mortgage holder.
All states allow Judicial Sale, while only approximately 2/3 of states allow Power of Sale. Power of Sale is usually faster than a Judicial Sale.
Let’s take a look at each type of foreclosure process.
The first step in the Judicial Sale foreclosure process is the mortgage lender will file suit with the court system. Then, you will receive a letter from the court demanding payment, or the NOD. Typically, you will have 30 days to respond with payment to avoid foreclosure.
At the end of the payment period, a judgment will be entered and the lender can request the sale of the property by auction. By and large, several months after the judgment the sheriff’s office conducts the auction of the home. Once the property is sold, you are then served with an “eviction notice” by the sheriff’s office and must vacate your home immediately.
Power of Sale
As mentioned previously, this type of foreclosure process is faster than that of the Judicial Sale process. Let’s take a look at the steps required in this process:
- You are served with the NOD by the mortgage lender demanding payment of your loan.
- After an established waiting period (documented in the notice), a deed of trust is created that temporarily conveys the property to a trustee.
- The trustee will then sell the house at a public auction for the lender.
It is important to note that in most instances, this type of foreclosure is subject to judicial review to ensure all steps were carried out legally. Additionally, there is usually a requirement for the lender to post a public notice of sale for the auction.
No matter what type of foreclosure process is used, it is critical that the lender contact any other parties involved of the proceedings. For example, if the homeowner has a home equity loan attached to the property, the mortgage lender must notify the third party (or lienholder of the home equity loan) of the foreclosure. Additionally, the homeowner may be notified and given deficiency judgments if the sale of the property doesn’t satisfy the amount of the loan.
If you are in the unfortunate place of foreclosure on your home, you still have some options to consider. Consider to the following as viable options in your circumstance.
You can call your lender and ask them to reinstate your loan; remember, all lenders want to be paid. You may be allowed to reinstate your loan or make the loan current with a lump-sum payment. You may even be able to arrange for scheduled payments over a period of time. In most instances, the lender will try to work something out with you.
Let’s take a look at how this might work:
Janice falls behind three payments on her house. She pays $2,000 a month for a mortgage payment, and now must add $500 in late fees to the payment, therefore, she now owes $6,500 to reinstate her loan. She sells some of her belongings and earns $10,000 from the sale and pays the lender the owed amount. She continues to make her payments, the NOD is cancelled and the home is brought out of foreclosure. The only remembrance of the issue is that Janice’s credit was hit with a NOD, which will be there for a little while.
Refinancing Your Home
If there is equity in your home and you are not too far behind on your payments, you may be able to refinance your home and lower your monthly payment. In most instances, your lender will refinance the existing loan and wrap any late fees into the new loan. The issue is that in most instances, there isn’t enough equity in your home to do a refinance.
Participate in a Loan Modification Program
This program allows you to modify the terms of your loan to make it more affordable. The lender will look at four critical areas, in the following order:
- Lower your interest rate.
- Extend the term of your loan.
- Principal forbearance.
- Principal forgiveness.
Use the FHA
If you have an FHA-approved loan, you can get in touch with a counselor to help you with some options you can take to avoid foreclosure. In most instances, the counselor will negotiate with the lender on your behalf.
List Your Home with a Realtor
This option is really only a good option if you have equity in your home. Why? Because you must pay realtors fees or commission if they list your home (typically 4%-6% of the purchase price). If you do not have equity in your home, you will have to increase the price of your home to make any money, and that will make it practically impossible to sell. Plus, it is difficult to qualify for a loan if the home is selling for more than it is worth.
Sell Your Home Yourself
Anyone can sell their own home. All you need to do is put a FOR SALE sign in your front yard and you are ready to go. However, if you do not live in a “high traffic” area, this option may be very difficult. You will need to network, place ads, and other cost-based marketing options to sell your home. Also, you may still not get the amount needed to forgive your debt to your lender.
Give Your Property to Your Lender
Your lender may take your property back if there are no other liens on the property, or if they are the party with another lien on your property. Basically, you would need to transfer ownership to the lender using what is called a “Deed in Lieu of Foreclosure,” which is also sometimes referred to as a “friendly foreclosure.” While this deed does not protect your credit, or cut of the rights of any junior or secondary lien holder, it will avoid the possibility of a deficiency judgment if the property fails to produce enough to cover the outstanding debts after it goes to auction.
If you have any equity in your property, this is probably not a good option because you will forfeit any right to surplus from the sale of the property.
There are companies and realtors that will assist with negotiating with your lender to sell your home at a discounted rate and avoid foreclosure. Instead of buying from a seller, you are purchasing the property directly from the lender for a discount. Let’s take a look at an example of how this may work:
Mark is a homeowner who is facing foreclosure and has an existing first mortgage of $400,000. He writes an offer to his lender for $325,000, which is accepted as full payment for the loan.
Why will a lender accept a short sale? First of all, they do not like to have excess inventory and bad loans on their books. A discounted loan amount is much better for a lender than a write off, and they can usually sell the property without a huge loss.
Second of all, lenders know they will most likely lose a lot more money if the home goes to auction. Plus, there are a lot of fees associated with an auction. It is best for a homeowner to perform a short sale when the property is in the pre-foreclosure state.
Bankruptcy should be considered as a last resort, prior to foreclosure. In essence, bankruptcy will allow you to put a barrier around your home where no one can touch you; however, there are serious ramifications with this option. There are two main types of bankruptcy you can file: Chapter 7 and Chapter 13.
Let’s take a closer look at each type of bankruptcy.
Chapter 7 Bankruptcy
When a person files for bankruptcy under Chapter 7, it is called "liquidation." This type of bankruptcy is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects non-exempt property of the debts, sells it and distributes the proceeds to the creditors.
In the case of homeowners, you cannot buy anything, sell anything or give anything away. All of your assets are frozen. If in the middle of the foreclosure process, a Chapter 7 bankruptcy will stop it. The trustee will then be asked to release them from an automatic stay so they can continue with the foreclosure process.
Chapter 13 Bankruptcy
When individuals file for bankruptcy under Chapter 13, they use future earnings to pay off creditors. It is considered to be more of "rehabilitation" than liquidation. In these proceedings, a trustee is appointed to overlook the assets of the debtor, and creditors are prohibited from seeking repayment of debts owed to them. Chapter 13 is like a debt consolidation plan; however, bankruptcy will be reflected on your credit report.
If you continue to make your mortgage payments with the new debt consolidation plan, you will be protected from foreclosure; however, if you don’t, the foreclosure process will begin again.
Do Nothing and Foreclose on Your Property
This is without question with worst option of all the options discussed. Basically, you leave with nothing in hand and a foreclosure on your credit report. You should try something to get out of your property; it could mean the difference between a few thousand dollars in your property compared to nothing and a foreclosure on your credit report.
As with many things in our world today, if it sounds too good to be true…it probably is. There are many people ready to take advantage of desperate people trying to salvage their home and their credit rating. The following are five common foreclosure scams to avoid:
Equity skimming is when you are approached by an individual who offers to buy your home at the full asking price. The "buyer" tells you that he/she will assume the loan and that you can move out and he/she will take care of all the payments. However, this buyer collects rent for the next six to eight months and does not make any mortgage payments. Unfortunately, you are still responsible for those payments and so the home goes into foreclosure. Some investors will take over a loan for you, as it is a great technique to assume a loan; however, you must recognize that you are still obligated to that loan and responsible for the payments. It is imperative, therefore, that you are involved with the process. Don’t just walk away and think everything will be fine.
Bait and Switch
This is when a “buyer” tells you he/she will bring your mortgage loan current and suggests you can stay in your home. The “buyer” then asks you to sign a few documents so he/she can protect his/her interests; a few weeks down the road you get an eviction notice. Homeowners must protect themselves in the case of any type of loan assumption.
This is where homeowners sign over the deed with the assumption that they will remain in the home as a renter or lease it from the buyer and eventually buy it back over time. Then, when given the terms of the new agreement, there is no way they can buy back the home. The homeowner is then left with nothing and the “buyer” walks away with most or all of the equity. The way to defeat this strategy? Make sure you sign a contract with the potential “rescuer,” and if there are any terms you are unsure about, talk to an attorney.
In most instances, these are online companies who claim to help you stop a foreclosure auction. Then, they charge exorbitant fees that you cannot afford for services you could actually do yourself for free. When all is said and done, you have been charged more money and are in the same boat as you were before you started.
Some groups claim to be able to help you out of a foreclosure for certain fees. The problem here is that the services offered can actually be obtained or done for free. There are some organizations that will provide you with these services without you having to pay a dime…find them or simply talk to your lender.
Avoiding Foreclosure Scams
So, how do you avoid these types of foreclosure scams? Here are a few things to consider:
- Don’t sign anything you do not understand.
- If you feel pressured into transacting any type of business, back away.
- If it looks too good to be true, it probably is.
- Don’t sign over your deed to anyone without some type of closure or agreement for your protection.
- Avoid paying anyone who claims they can stop your foreclosure.
How does foreclosure affect you? The most immediate effect is that you no longer have a home. Some people are able to get into an apartment or condo, or rent another home, but others must rely on family to help them. Some may even become homeless.
The foreclosure will also affect your credit rating. While being foreclosed has a negative impact on your credit rating, you will be surprised to see that it is not as detrimental as more drastic options. Unfortunately, it can also affect you both mentally and physically (e.g., stress, depression, etc.).
Foreclosures may also have a negative impact on a community. Statistics show that one foreclosure can cost as much as $34,000 in local government agency bills (e.g., trash removal, unpaid utilities, etc.). Property values can also decrease when too many homes are foreclosed.
The most important thing you must do after a foreclosure is to repair your credit. Make sure all your other accounts are in order and paid on time. You may be able to secure a smaller loan; making payments on this loan will help you to repair your credit. Furthermore, you may be able to secure another home loan with a large down payment.