Because of the recent burst in the housing market bubble, more and more homeowner have found themselves either unable to make their mortgage payments and/or “upside down” on the equity in their homes. Being upside down means your home is now worth less than the amount you owe on it so even if you went to sell it, you would have to add money to the sales price in order to pay the lender off in full.
With the glut of houses currently in foreclosure and on the market along with the tightening of credit requirements enabling people to get a home loan, lenders do not want to foreclose on a property unless they are left with absolutely no choice. However, when this happens the foreclosure process proceeds differently depending on whether the property is located in a judicial or non judicial state.
A judicial state is one where the court must approve of the foreclosure and it’s process follows a very similar one as any litigation with a summons and complaint, answer, hearing, and resulting judgment.
A non-judicial state is one where the foreclosure process does not have to go through the courts. The state government has setup a list of steps the lender must follow and if they do then the foreclosure is granted. These steps can vary buy normally go as follows:
- A borrower misses a payment on their mortgage and is now in default. Technically after missing just one payment a lender can begin the foreclosure process but, as I stated above, this is not something they want to do so they will do everything in their power to work out a resolution with the homeowner. Most lenders will wait up to 4 months before they decided a foreclosure process is necessary.
- Once a borrower is more than sixty days past due on their loan the lender can send out a letter to the borrower known as a Notice to Accelerate. This tells the borrower that the lender plans to accelerate the loan and make all future payments due now along with any interest, late fees, attorney fees and penalties currently owed on the note. The borrower can at any time stop the foreclosure process by paying off the amount in arrears along with these penalties.
- If the lender receives no response or satisfaction from the Notice to Accelerate then they will send out a Demand Letter the formally states the borrower is in default and all payments, interest, etc are now due. The borrower typically has 30 days to respond to the demand letter. If they do not satisfy the loan at that point then the foreclosure process continues.
- The lender will next send out a Notice of Default stating the borrower has defaulted on the loan agreement and the lender plans to proceed with a foreclosure action against the property in order to take possession of the property and recoup their losses on the loan. Once again the borrower normally has up to 30 days to respond to this Notice of Default.
- If the borrower fails to satisfy the requirements of the Notice of Default the lender will then serve them with a Notice of Sale. This is essentially an eviction notice informing the borrower of the lenders intention to sell the property at a public auction and giving the borrower notice that they must vacate the property within a certain time frame. This notice will list the actual sale date of the property. Most non-judicial states also require the lender to post this notice in the property local newspaper for a specific period of time before they can proceed.
- Once all of the above requirements have been met and the borrower still has not complied with their obligations to the lender then the property is sold at a public auction, also known as a “Sheriff’s Sale”. The property is then deeded to the highest bidder or to the lender if no one meets the reserve prices set at the auction.
It is important to note that a borrower can stop the foreclosure process at any step up until the sale date by bringing the loan current. Also, as I stated, lenders do not want to take these properties back into inventory as they normally will lose tens of thousands of dollars on a foreclosed house so they are very motivated to work with the borrower. This could be either through a loan modification or a forbearance agreement where the lender agrees to allow the borrower to start making payments again and takes the amount that is in arrears and sets it up as “second mortgage” on the property. This lets the borrower make additional small monthly payments to pay off the arrears along with their normal payment and retain the property.
There are also other programs that can help borrowers bring their loans current and allow them to continue from that point making their regular payments. Some are directly through the lender. Others are government programs that can help now, though the money will have to be paid back later.
Answering the question, “How does the foreclosure process work?” shows that there are many opportunities for borrowers to bring their mortgage current and avoid losing their home. There are also options that do not involve foreclosure, even if they do not allow one to keep his home such as a short sale. Almost any of these options is better than the damage a foreclosure can do to one’s credit rating.