Foreclosure means that your lender takes possession of your house to sell it in a legal process. The lender does this after the homeowner defaults on the mortgage loan. The lender has the right to sell the house to have the amount of money he lent to the borrower returned to him.
After receiving a mortgage loan from a lender, you must make monthly payments to repay the mortgage loan. If you miss several of these payments, the lender will declare that you are in default. You may be in default if you fail to live up to some of the other conditions that are set on the loan as well.
Foreclosure Example
Let’s say a homeowner fails to make monthly payments for 90 days. After 90 days pass, the lender sends a notice of default, and the foreclosure department in the lender’s bank or credit union receives the loan. This is when the reinstatement period begins. At this time, the homeowner must arrange to make up the missed payments within 30 days. If this does not happen, the lender starts the foreclosure process.
The Beginning of the Foreclosure Process
The law bases foreclosure on the deed of trust contract. This means that the lender may legally use the property as collateral for the loan if the borrower defaults in the future. The foreclosure process can begin if the borrower misses one payment. After this occurs, the lender must send the borrower a notice that states that he did not receive the monthly payment.
After a borrower misses a second payment, the lender will send a demand letter. After a homeowner receives a demand letter, he has a chance to make up the payments he missed if the lender is willing to accept them.
If a borrower misses monthly payments for 90 days, the lender sends the borrower a notice of default. This is when the foreclosure department receives the loan, and the borrower’s 30 days of negotiations begin. If the lender does not reinstate the loan, he can begin the foreclosure process.
The Foreclosure Process Continued
Each state has its own rules for how foreclosures must proceed. In general, the first thing that the lender must do is offer the borrower several options for avoiding foreclosure.
Some states must undergo a judicial foreclosure process in which the lender asks the court’s permission to foreclose on the property. To do this, the lender must demonstrate to the court that the borrower is in default. The court either approves or disapproves the foreclosure. If approved, the sheriff will auction the property so that the lender can receive the proceeds. The lender can also take possession of the property and sell it however he or she chooses.
Some states use a nonjudicial foreclosure process. It is known as a “power of sale.” This type of foreclosure is simpler than the judicial process. The courts do not need to be involved, but if the homeowner decides to sue the lender, the matter will have to go to court.
How Do You Avoid the Foreclosure Process?
You can avoid foreclosure even if you have missed a couple of payments. If you are experiencing a temporary financial hardship, you must inform your lender. The lender may decide to reduce your payments or suspend them for a specified period. For example, you may have seen your income decrease significantly, or you may have been hit with very high medical bills. Let your lender know, and you may be able to work out an agreement.
What Is a Short Refinance?
A short refinance is when your lender refinances your mortgage loan after you have missed some monthly payments. When a lender offers you this option, he is helping you avoid the foreclosure process.
In a short refinance, you will receive a new loan, but it will be a smaller mortgage loan than the one you currently have. Your lender may even forgive the difference between the original loan and the refinance loan. This helps you pay your mortgage obligation because you will have a smaller monthly payment. Lenders agree to offer you a short refinance because it is less costly than the foreclosure process.
What Is Reinstatement?
If you are able, you can make up the payments that you missed during the reinstatement period. Then, you will return to making your monthly payments and the danger of foreclosures falls into the background.
What Is a Deed in Lieu?
Some people cannot make up their payments during the reinstatement period and cannot qualify for any of the other options for avoiding foreclosure. If this is the case, they can sign a deed in lieu of foreclosure. A deed in lieu agreement requires you to give the deed to your house to your lender to avoid foreclosure. After signing this agreement, the lender no longer obliges you to make your mortgage payments, and the lender agrees not to report a foreclosure to the credit bureaus.
After you give your lender the deed to your house, the lender will release the lien that he had on the property, and you will lose the house. Although you will lose the house, you will not suffer the most serious consequences of having a foreclosure on your credit report.
What Is a Short Sale?
A short sale sells your house for less than the amount that you currently owe your lender. It will be up to the lender to approve a short sale. If so, the lender will receive the entire amount for which the house sells. To qualify to do a short sale, you must be experiencing financial hardship, and the house has to be worth less than the amount you owe the lender.
What Are the Consequences of the Foreclosure Process for the Borrower?
The consequence of a foreclosure is that it shows up on your credit report. Your lender reports the foreclosure to the credit bureaus, and it remains on your credit reports for seven years.
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