Definition, Process, Ways to Avoid

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  • Foreclosure is when a mortgage lender repossesses your home because you haven’t paid off your loan.
  • The exact details of a foreclosure process vary depending on your state and the lender.
  • There are options to avoid foreclosure if you act quickly and stay in communication with the lender.

The thought of losing your home is scary. But if you’re no longer able to meet your monthly mortgage payments, the lender will likely pursue foreclosure.

Although foreclosure is a financial situation that no one wants to face, it is useful to understand the details of this legal process.

What is foreclosure?

Foreclosure involves a mortgage lender taking possession of your home because you haven’t paid off your loan. Usually this is due to the lack of several monthly payments. However, the lender can foreclose on a home if the borrower fails to meet any of the other conditions stated in the mortgage documents.

Levon Galstyan, accounting consultant at Oak View Legal Groupsays some of the common reasons homeowners find themselves in this situation include surprisingly high costs, increased interest rates, job loss, medical emergencies that lead to more debt, and natural disasters.

From the lender’s perspective, foreclosure is necessary to recoup financial losses. After taking possession of the home, most lenders will sell it to recover the borrower’s outstanding balance.

Unfortunately for the previous owner, a foreclosure will appear as a negative mark on his credit report for seven years.

The foreclosure process

Details of the foreclosure process vary from state to state. A borrower is technically in default 30 days after missing a payment. Typically, lenders begin the foreclosure process three to six months after the first missed payment.

Once the borrower is in default, the lender indicates its intention to foreclose on the loan by issuing a notice of default. At this point, you will enter the pre-lockdown phase.

“To delay or stop foreclosure, borrowers can challenge the process and file a petition if they need more time,” Galstyan said.

Depending on the situation, the lender may be willing to set up a new method of payment. However, it does involve disclosing your financial situation to the lender or mortgage agent. If he decides to go ahead with the lockdown, the “duration varies by state and often ranges from 120 days to nine months,” says Galstyan.

Throughout the foreclosure process, it is imperative that homeowners carefully read all notices sent by the lender.

“Make sure you attend any hearings you are called to and use the services of your local court’s legal aid department for free advice and guidance,” says Bill Samuel, owner of Development of the blue scalea Chicago-based home buying company.

Types of input

Foreclosures fall into a few different categories. Here is an overview of each:

  • Judicial foreclosure: A judicial foreclosure involves the lender taking legal action in a local court. If your lender is pursuing a legal foreclosure, you will receive a letter in the mail requesting overdue payments. After that, you will have 30 days to submit the money or the house will be sold at an auction conducted by the local court or sheriff.
  • Foreclosure of power of sale: If the mortgage has a power of sale clause, the lender can seek a power of sale foreclosure. After a default on the loan, the lender will send a letter demanding payment. If you don’t catch up within a set time frame, the mortgage company can auction off the property without going through the local court system.
  • Strict lock: With a strict foreclosure, the lender takes legal action after the homeowner defaults on the loan. If you cannot catch up on payments within a specific time frame, the lender will take ownership of the property.

Can I refinance in foreclosure?

If you are having trouble paying your mortgage and want to avoid foreclosure, you may be wondering if reducing your payment through a refinance is an option. It may be, but you’ll usually need to start the process before the foreclosure begins. With a delinquent mortgage, it can be difficult to get approval from a new lender.

Does foreclosure affect my credit?

Since a foreclosure will stay on your credit report for seven years, it can have a lasting effect on your credit score.

With a low credit score, your ability to borrow money in the future is hampered. For example, if you want to finance a vehicle within the next two years, you will likely face higher interest rates and limited borrowing power.

In the years following a foreclosure, your home buying options are also limited. With conventional loans, you will have to wait seven years after a foreclosure to obtain a new mortgage. If you are looking for a government guaranteed mortgage, you may not have to wait that long. But either way, a foreclosure will impact your home buying options for years to come.

7 ways to avoid seizure

If you are facing a foreclosure, it is a stressful and uncomfortable situation. But there are steps you can take to prevent it.

1. Stay in touch with your lender

Lenders generally won’t offer help unless you ask for it. Staying open with your lender about your financial situation could lead to a solution.

2. Ask for abstention

Forbearance is a temporary pause or reduction in your monthly payments. Some lenders are willing to grant this temporary reprieve to avoid foreclosure.

3. Request a loan modification

If your monthly payment is just too high, ask your lender for a loan modification, which is a permanent change in the terms of your loan. A longer repayment period or lower interest rate could result in a more manageable monthly payment.

4. Refinance

For homeowners who are worried about their ability to make future mortgage payments, consider refinancing with the goal of getting a lower monthly payment. You will likely need to be up to date on your payments before you qualify for a refinance.

5. Sell the house

If you can sell the house for more than you owe, you can use the proceeds from the sale to pay off your debt.

6. Pursue a short sale

A short sale is selling your home for less than you owe. This option involves getting approval from the lender before signing on the dotted line.

7. Deed in lieu of foreclosure

If you can’t sell your home, delivering the bill of sale to the lender can free you from your debt.

The bottom line

Foreclosure is a process no one wants to go through, with ramifications that can impact your finances for years to come. If you need help navigating the process, ask a HUD Certified Housing Counselor in your state.

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