The prospect of foreclosure is a grim and difficult one for homeowners. However, instead of despairing over what cannot be done, it is essential to be proactive and take the initiative.
First, you will need to understand the process by which the bank or lender takes ownership of your home and the several ways to prevent this from happening.
Why Foreclosures Occur
It may be difficult for some to pay off the price of an expensive home all at once. Most people pay a certain percentage upfront with a down payment, and then spend the rest of the amount using a loan paid off over the next couple of years.
In these cases, your house is often used as collateral for the loan. In some cases, the pay installments can be worth thousands of dollars, and some owners cannot pay it off after a certain period.
The lender can repossess the property, evict you or even sell if you cannot make payments. This is known as foreclosure.
Lenders usually lend money only to individuals with a good lend-to-value or LTV ratio, which calculate the risk that a lender takes on to give a secure loan.
Individuals with more than an 80% LTV ratio require a PMI or Private Mortgage Insurance which adds another tens of thousands of dollars to the loan amount.
The Foreclosure Process
Foreclosure depends on lenders and state laws and is generally slow. You are unlikely to get evicted for being late by a few days or a week but may be liable to late fees in as little as ten days. Here is what transpires throughout the process in brief.
- Notices begin to arrive as soon as you miss a payment. After three months have passed, you will receive a ‘Demand Letter” requesting payment within 30 days. Failure to pay then will render your loan defaulted, and you will be referred to the lender’s attorney.
- Now the foreclosure proceedings begin, which may be judicial, where you are brought to court via summons for foreclosure by the lender.This process is long and can take 60-90days between each event. On the other hand, nonjudicial proceedings are much faster and involve the lender’s use of the “power of sale” as per the agreement clause without needing a judge. In both cases, a notice for payment followed by a ‘Notice of Default” and “Notice of Sale” is given.
- Then your house is put up for auction at court or the local sheriff’s office. If there are no buyers, the house is given to the lender. You will be given an eviction notice and evicted if you still reside in the house.
- However, many states allow owners a period of redemption, to get back their home after the foreclosure provided that they pay back the loan as well as the foreclosure costs.
It’s vital to understand the dates and state timelines if you plan to sell your house before foreclosure resumes.
Consequences Of A Foreclosure
Losing your home is the most obvious consequence of foreclosure. You will also need to find new accommodations on short notice and essentially be uprooted from your usual life. This can be incredibly stressful for you and your family.
You may also be liable for additional fees. These include late fees to the lender, legal fees for the foreclosure proceedings as well as any money that you owe after the sale of your home.
Your credit scores may also be hit due to the foreclosure so it will be difficult to borrow money for another home. You might also be rejected for any kind of affordable loan and even have issues finding a job.
How To Avoid A Foreclosure
No one wants to lose the house they have saved up for years and painstakingly furnished to make a place for themselves. Fortunately, there are many ways to overcome this dilemma and avoid foreclosure.
1. Gather Your Loan Documents And Set Up A Case File
Organizing your documents is the first step when you miss a mortgage payment. Get a file to keep records of all necessary documents like copies of mortgage, loan documents promissory, and the deed of trust.
You will also need copies of payments you have made, property tax information, monthly billing payments, insurance information, escrow statements, and any correspondence with your servicer, including letters.
2. Learn About Your Legal Rights
Now that you have gathered your documents, carefully read through them. You should especially pay attention to the late monthly fee, whether paying the due fees will reinstate your loan status, and other fees charged by the servicer. In most states, you are safe from foreclosure for up to 120 days.
3. Organize Your Financial Information
Once you have collected your loan documents, you will also need to organize your financial information. This includes your total monthly income as well as expenditure.
A record of profits and losses, monthly gross wages, federal tax returns, social security, alimony, and child support is necessary. If you are unemployed, then that includes unemployment income as well.
You will also need records of credit card payments, mortgage payments, food, and student loan entertainment records to determine whether you can apply for other foreclosure alternatives.
4. Review Your Budget
If you are in a situation that has led to the foreclosure of your house, it means it is time to revisit your budget and curtail your expenses.
You need to cut down on your expenses and set a realistic budget. Examples include avoiding takeout foods, skipping Starbucks, making coffee at home, and using public transport instead of your car. You can also set a lower monthly payment for your credit card debt.
6. Call Your Servicer
The best way to deal with any issue is to tackle it before it gets out of hand. As soon as you suspect that you may miss a payment or have already done so, contact your servicer and inquire whether you qualify for foreclosure alternatives.
7. Contact A Hud-Approved Housing Counselor
A housing counselor is experienced with other foreclosure cases and is your best bet in avoiding foreclosures and finding other ways to help you.
8. Avoid Scammers
For-Profit Foreclosure Rescue, and Loan Modification Companies that claim to modify your loans, provide foreclosure relief, or give debt counseling are usually scammers and must be avoided at all costs.
9. Learn About Your State’s Foreclosure Laws
As foreclosure laws vary between states, you must be aware of those that apply to your state. This includes information such as your rights and protection during the proceedings and the deadline for the deal before losing your house to foreclosure.
10. If All Else Fails, Sell The Home Before The Foreclosure Sale Or Give The Home To The Lender
Once you have tried all methods that you could think of, then selling the house to your lender as a last resort may save your house from foreclosure.
For those with home equity, the sales generated can be used to pay off the mortgage loan. However, make sure that you sell the home at a good price to be able to pay off the loan. Alternatively, you can transfer the property title to the lender via the deed in lieu of foreclosure.
Unfortunately, foreclosures are sometimes unavoidable. However, consider it as a financial setback rather than a death sentence. Try to exhaust all possible ways to save your house, and then if all else fails, prioritize securing a place for yourself and your family.
Although your credit score might dive the foreclosure, it is important to focus on building a steady source of income and setting budgets.
Once you start paying your bills including credit bills on time, your score will gradually improve. Then after seven years, once the foreclosure is off your credit report, you will be ready for a new financial start.
Frequently Asked Questions (FAQs)
Foreclosure can be a daunting and complex process, here are answers to some common queries that homeowners have.
Which Will Keep You In Your House Longer, Foreclosure Or A Short Sale?
Keep in mind that both cases will cause you to lose your house. However, the key difference is in the duration of the process.
Foreclosure is usually a long process that gives you time to look for new accommodations but you may be evicted as soon as the procedure is complete. On the other hand, short sales allow for room for negotiation with your buyer/lender.
How Do You Buy Foreclosed Homes?
Most foreclosure properties are bought at auctions that take place in courthouses, convention centers, private auction companies, or even online. These auctions usually follow state laws and whether the given state allows judicial foreclosures.