The Home Foreclosure Process
It is in the best interest of every homeowner to avoid home foreclosure. Foreclosure is a process whereby the lender tries to obtain the remaining balance of the loan from the borrower when they default on the loan. If a homeowner has been late on the payments for more than a couple of installments, the owner of the mortgage loan / lien will be able to put the property up for sale through the foreclosure process. Home foreclosures can be very stressful and complex because a person or family is losing their home. And when it happens the borrower’s credit record is negatively impacted for many years.
The Stages of Home Foreclosure
1) Missed Payments
Home foreclosures occur when a homeowner misses several mortgage payments. Lenders normally send out notices after the first missed payment, but actual foreclosure proceedings may not begin for another 90 – 120 days after the delinquency.
2) Notice of Default (NOD)
If payments are not made, the lender will file a Notice of Default, which is then recorded with the county recorder’s office. This notice serves to inform the homeowner that they are in default on the mortgage loan and that they have a certain amount of time (usually 90 days) to bring the loan current.
3) Pre-Foreclosure
This is the period in which the homeowner is still within a limited prevention time period and can prevent the foreclosure from occurring. Some of the potential solutions include loan modification, repayment plan, or a sale of the house.
4) Notice of Sale
If the default is not resolved, the lender will issue a Notice of Sale and set a date for the home to be sold at auction. This notice is also recorded with the county and advertised in local newspapers.
5) Auction
If the homeowner fails to cure the loan delinquency, the property is sold at public auction to the highest bidder. In general, the minimum selling price will be sum of the unpaid balance of the mortgage loan plus penalties. When the home is not sold at auction, the ownership of the home is turned over to the mortgage lender and it becomes a Real Estate Owned (REO) property.
6) Eviction
If the homeowner does not vacate the property after the auction, the new owner (often the lender) may begin eviction proceedings.
Possible Solutions to Avoid Home Foreclosure
1) Loan Modification
– What it is: A change in one or more of the terms of the mortgage, including changing the interest rate, length of the loan, or adding missed payments to the loan balance.
– How it helps: Makes payments more affordable, so the homeowner can keep the home.
– Considerations: Homeowners must meet certain financial hardship requirements and receive lender consent.
2) Forbearance Agreement
– What it is: Missing or reduced mortgage payment with an agreement to repay the missed payments at a later date.
– How it helps: Offers immediate help for homeowners who are in a position to not be able to meet their mortgage obligations for the short-term.
– Considerations: The homeowner will have to pay the missed payments which may increase the installments in future.
3) Repayment Plan
– What it is: An agreement to pay the missed payments over a certain period of time and include a portion of the past due amount in future installations.
– How it helps: Enables homeowners to schedule past-due payments without having to come up with a single large payment.
– Considerations: The client must be in a position to incur higher expenses for a certain period of time.
4) Short Sale
– What it is: An endeavor to sell the home to the lender when there is a remaining balance on the mortgage through the lender.
– How it helps: Prevents foreclosure and may be less damaging to the homeowner’s credit history than a foreclosure.
– Considerations: It involves the agreement of the lender and may lead to a promissory note being written when the sale does not cover the full loan amount.
5) Deed in Lieu of Foreclosure
– What it is: The process of handing over the property to the lender in order to have the mortgage balance erased.
– How it helps: Does not lead to a home foreclosure and may not have as much of a negative impact on credit history as other options.
– Considerations: The lender has to agree, and the homeowner has to move out of the property.
6) Refinancing
– What it is: The replacement of the existing loan with a new loan, preferably one with better terms.
– How it helps: Can lower the monthly payments or increase the time of the loan.
– Considerations: It requires a good credit and equity in the home, which is usually not available to homeowners in financial distress.
7) Government Programs
– What it is: Programs such as Home Affordable Modification Program (HAMP) or Making Home Affordable (MHA) may offer help to homeowners in financial distress.
– How it helps: Provides possibilities for loan modification, refinancing, or other assistance.
– Considerations: There are certain criteria that has to be fulfilled and the process may take time.
8) Bankruptcy
– What it is: Filing for bankruptcy can stop home foreclosures temporarily through an automatic stay.
– How it helps: Provides time to evaluate other solutions and possibly to keep the home.
– Considerations: Bankruptcy has long term credit consequences and may not be appropriate for everyone.
9) Sell The Home To Dr Cash Home Buyers
– What it is: A cash sale to a home buyers company will payoff the mortgage loan plus the penalties and interest.
– How it helps: It is a quick sale and no repairs are necessary.
– Considerations: The homeowner does not have to suffer the long-term consequences of having a home foreclosure as part of their credit history.
Other Home Foreclosure Considerations
Right of Redemption
Texas and some other states have a “right of redemption”, meaning that after the foreclosure sale the homeowner may have a certain period of time (e.g., 6 months, 1 year) to reclaim ownership of property by paying the winning bid amount plus interest and costs.
Early Action Is Crucial
Contacting the lender as soon as financial difficulties arise can open up more options. Seeking advice from a HUD-approved housing counselor or a legal professional can also provide valuable guidance tailored to individual circumstances.
Interesting articles about residential real estate in the United States can be found in our Blog.