Foreclosure: Definition And How To Avoid It
Foreclosure can sound scary, but just what does itmean? Let’s explore the ins and outs of how foreclosure works and equip you with the right measures to protect your home against it.
What Are Foreclosures?
Foreclosure is a legal process that causes a homeowner or borrower to lose possession of their property when they don’t make their mortgage payments. During the foreclosure process, the lender repossesses the property and sells it in an attempt to reduce any losses associated with the foreclosure process and the delinquent loan.
How A Foreclosure Works
When it comes to real estate, a mortgage lender has legal ownership over a property. In a mortgage, the borrower’s home is established collateral, and should you accrue missed payments, your lender can legally repossess the property.
Daunting as this may sound, keep in mind that foreclosure is a gradual process that could be prevented in early stages. And remember, since a foreclosed home or foreclosed property can be difficult to sell, it’s likely that your lender also wants to avoid foreclosure. This means your lender is likely open to working with you to keep foreclosure as a last resort.
What Is The Process For Foreclosure In Real Estate?
Since foreclosure is a legal process, it can look different from state to state, so be sure to research your state and county laws. For the most part, however, the stages of the foreclosure process in real estate will look similar. Let’s explore what each of these stages look like.
Step 1: Payment Default
The foreclosure process starts when a borrower fails to make at least one mortgage payment This is also known as a payment default.
Some mortgage lenders offer a short grace period for the borrower to make their payment before charging a late fee, in the 1st 30 days following a missed payment. At this stage, a lender is usually willing to make arrangements or adjustments to allow the borrower to catch up on their payments.
Step 2: Notice Of Default (NOD)
After 90 days, or three consecutive missed payments, your lender will send a notice of default (NOD). An NOD gives the borrower 30 days to make good on their payments, before the foreclosure process will officially begin. Depending on state law, your lender may also be required to post an NOD on the property’s front door.
Step 3: Foreclosure Referral
Foreclosure referral happens when the loan is 120+ days delinquent and is sent to a law firm to begin the legal process of foreclosure. At this point, are growing legal fees that can quickly add up making it harder to find a workout option or catch up on payments
Step 4: Notice Of Trustee’s Sale (NTS)
At this stage in the foreclosure process, both the borrower and lender have likely discussed alternatives to foreclosure. But once it’s established there’s no way for the borrower to catch up on payments, the lender will begin trying to recoup their losses and send a notice of trustee’s sale (NTS).
An NTS is a written notice which informs the borrower that the lender has a scheduled date for a foreclosure auction. The lender must also record the impending sale with the County Recorder’s office and publish a public notice in the local newspaper. This public notice acts as both an advertisement for the property while also preserving the lender’s right to file a lawsuit with the court.
Step 5: Trustee’s Sale Or Foreclosure Auction
After a mortgage lender takes the proper steps to notify the homeowner or borrower and local municipalities of a foreclosure, they can try to sell the foreclosed property at a public auction. Oftentimes, the homes sold at foreclosure auctions are sold at a loss, but if the home sells for more than what is owed, any profits go toward paying off other liens on the property.
Foreclosure auctions usually set a minimum bid equal to the balance owed on the mortgage and the home is sold as-is. Borrowers have until the date of the auction to catch up on payments and keep their home.
Step 6: Real Estate Owned (REO) Or Post-Foreclosure
When a property doesn’t sell at auction, the lender or bank will gain ownership of the property. This home is known as real estate owned property (REO) which the lender can try to sell –usually at a low price.
Step 7: Eviction
The final step in the foreclosure process is most synonymous with foreclosure: eviction. Once a foreclosure auction ends, the property will have a new owner: the auction winner or the lender. The borrower will be issued notice to leave the property within a given time frame – usually between 3 and 30 days – and if they don’t, they may be vulnerable to a lawsuit.
What Are The Types Of Foreclosures?
There are two types of foreclosures: judicial and non-judicial. Since the kind of foreclosure that is required varies by state, check your state’s regulations to better understand what the foreclosure process might look like for you.
Judicial foreclosures are when the lender goes to court to get a judgment to foreclose on a home - assuming the mortgage does not include a power of sale clause, which allows a lender to auction a home without involving the judicial system. The borrower has a period of time to respond and make their payment or face losing their home.
Judicial foreclosures are accepted in every state and are required in some. Due to their nature, judicial foreclosures tend to be more time consuming.
The U.S. states which only allow judicial foreclosures include:
- New Jersey
- New Mexico
- New York
- North Dakota
- South Carolina
Non-judicial foreclosures don’t require that the lender goes to court and typically occur when a mortgage has a power of sale clause or if a borrower’s promissory note is tied to a deed of trust. In a deed of trust, the trustee - usually a title company - may also seize ownership of a property and sell it without involving a court.
Non-judicial foreclosures eliminate the need for a lawsuit and are therefore a faster, more direct foreclosure process.
The U.S. states which allow non-judicial foreclosures include:
- New Hampshire
- North Carolina
- Rhode Island
- South Dakota
- West Virginia
Why Are Foreclosures Bad For Neighborhoods?
Foreclosures can negatively impact neighborhoods by lowering the sales prices of surrounding homes, due to their significant drop in property value. This is why the Department of Housing and Urban Development requires that foreclosed homes be made public and offers comprehensive lists by area.
How To Avoid Foreclosure
If you find yourself in one of the stages of foreclosure, take a deep breath. You may still have options to avoid foreclosure. Here are some of them:
- Ask For Forbearance: Forbearance allows borrowers to pause mortgage payments for a limited period while they build up savings, increase their income or decrease debt.
- Ask For A Modification: A modification takes the past due balance and rolls it back into the mortgage. This can result in a change to the existing rate and term of the mortgage.
- Apply For A Refinance: This option must be taken before the foreclosure process begins, but if you fear you’re at risk of foreclosure, refinancing to more manageable payments could keep you from missing a payment.
- Get Approved For A Repayment Plan: Many lenders may allow for a repayment plan, which allows borrowers to pay an additional sum each month to recover a missed payment, before resuming their mortgage payments as it was before.
- Ask For A Mortgage Reinstatement: A mortgage reinstatement entails paying a lump-sum amount to cover all missed payments, before resuming mortgage payments as normal.
- Apply For A Short Sale: A short sale is when you sell your home for less than what you owe on the mortgage to help with debt and save your credit best you can. You must have lender approval for a short sale and your lender will receive all profits.
Here are some common questions about foreclosure, but remember to research locally for the most accurate information to you.
How does a foreclosure affect credit and debt?
Foreclosure has a significant negative impact on your credit score and remains on your credit report for 7 years following your first payment default. The extent to which a foreclosure hurts your credit varies depending on your previous credit history, but many borrowers with a foreclosure event will face higher interest rates and may have difficulty financing or renting a home down the road.
Does an appeal stop a foreclosure sale?
When dealing with a judicial foreclosure, filing for a Notice of Appeal and a merit brief may stop a foreclosure sale. However, you will likely need professional representation who must argue that the lender acted in bad faith or that there were significant errors made during the judgment of the foreclosure.
What is a deed in lieu, and is it better than a foreclosure?
Signing a deed in lieu is when a borrower voluntarily gives their lender the deed to their home. Although you still lose your home this way, your credit will face much less severe effects than with foreclosure, including remaining on your credit report for 4 years rather than 7 years with a foreclosure.
The Bottom Line
We all know the importance of making mortgage payments on time, but in cases where you do default on a payment you may still have options. Be sure to communicate openly with your lender to figure out the best plan of action and you may be able to avoid foreclosure.
Every lender and case is unique, so do your best to learn how to stop a foreclosure on a home and find a solution which works for you.