Foreclosure is a sequence of proceedings that allow a lender to sell or repossess a home when the borrower has violated the terms of their mortgage agreement. Depending on the state in which you live, the process can be lengthy and expensive, as well as potentially devastating to your credit. Below, we outline the foreclosure process, outline how you can prevent foreclosure, and provide useful information for individuals who purchase foreclosed upon homes.
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Missing Mortgage Payments
If you miss a payment on your mortgage, your loan becomes delinquent. Many lenders give borrowers a 15-30 day grace period after the missed payment before assessing a late fee and reporting the missing payment to one of the credit reporting bureaus. Missing even a single mortgage payment has the potential to negatively impact your credit score, and will remain on your credit report for seven years. The severity of the impact will depend on the seriousness of the delinquency, meaning that the longer your account remains delinquent, the greater the impact on your credit will be.
Though the rules vary by state, you’re not in danger of foreclosure unless you consistently neglect to make your payments. Most lenders will start the foreclosure process at the 4-6 month mark.
If you’re having a hard time making your payments, and wish to keep your home, there are a number of things you can do in order to reverse the foreclosure process.
“Communication is key,” says Whitney Fite, president of Angel Oak Home Loans in Atlanta. “Reach out to the servicer early to explore your options if you know you’ll have trouble making your payment on time.”
- Request a forbearance: If your financial troubles are temporary, your lender may be willing to reduce or suspend your mortgage payments for a period of time until you can resume making your payments. This option is particularly prudent if you contact your lender before missing a payment.
- Refinance your loan: If you have good credit, and a strong history of making payments, loan refinancing might be an option. Since loan refinancing lowers your interest rate, refinancing at a lower rate may help to substantially lower your payments.
- Apply for government loan modification programs: There are government programs, such as the Home Affordable Modification Program that are meant to help individuals struggling with serious debt problems. These programs provide housing counselors that can assist you with mortgage assistance options, help you create a budget, point out local resources that may be of use to you, and help to explain and submit documentation to the correct parties.
- Negotiate a repayment plan: Some lenders may be willing to negotiate a repayment plan for those who have fallen behind on their mortgage payments.
Pre-Foreclosure: Mortgage Goes Into Default
If you continue to be delinquent on your loans, your mortgage will move into a default status. Defaulting on your mortgage signals to future lenders and others who view your credit report that you have not met the terms in the home loan agreement. While missing payments is the most common problem, your loan can also go into default if you fail to pay property taxes, lack homeowners insurance, or use your home for illegal activities. This stage is known as pre-foreclosure.
Notice of Default
While the length of time it takes for a mortgage to reach default status varies by contract, state, and lender, you may start to receive notices as early as 15-30 days past due, These notices will warn you of your default status and ask you to correct the problem. If you continue to be delinquent on your payments, the lender will likely send more reminders, and make contact by other means, to be sure that your missed payment wasn’t an oversight, and to verify that you’ve received their other correspondences.
To mitigate damage to your credit score and avoid jeopardizing other borrowing opportunities in the future, it’s best to get in contact with your lender as early as possible. As mentioned earlier, many mortgage lenders are flexible about lowering or suspending payments for a period of time if you’re communicative with them throughout the process.
If you continue to be delinquent on your payments, your lender will file legal documents with the court to initiate foreclosure proceedings on the property. After these documents are filed, your reinstatement period begins.
A reinstatement period is a period of time in which you can stop foreclosure proceedings from moving forward by making your loan current, paying any late fees, and reimbursing your lender for any legal and filing fees. If you’re planning to take advantage of the reinstatement period, try to make your payments as early as possible, as the fees and fines will accumulate interest on a daily basis.
If you’re not interested or are unable to negotiate new terms with your lender, or cannot come up with adequate funds during your reinstatement period, you may be able to negotiate a short sale with your lender.
In essence, a short sale is one in which a homeowner accepts an offer for their home that is less than the amount owed on their mortgage. The seller, despite being short on the amount they owe the lending agency, is able to close the sale of the home.
Not everyone is eligible to list their home in a short sale, however. Mortgage lenders typically require that lenders prove the financial need for a short sale by submitting financial documents, such as W2 and income statements, along with a letter of hardship or an affidavit that explains why the borrower is unable to continue making payments on their mortgage.
While it sounds ill advised for a lender to approve short sales, lenders are often willing to approve them to avoid foreclosure proceedings, as they are costly and time consuming for every party involved.
A Notice of Sale is Posted
If you are unable or choose not to take advantage of the reinstatement period or short sale, the lender moves forward with the foreclosure process via a notice of sale. A notice of sale states that the lender will sell the home in a public auction and list the date that the home will be available to sell.
This notice is published weekly in the county newspaper where the home is located for a minimum of three weeks, and a notice is also sent to the homeowner through a certified letter. This helps to get the word out to potential buyers.
If you still want to reinstate your loan, however, negotiations are still possible, even this late in the process. Talk to your lender for your options moving forward.
If you’re looking to buy a home that is in the foreclosure process, however, it may be possible to buy a home before the auction is held. To do so, you would have to approach the title holder of the home, which at this point in the process would be the individual who has defaulted on their home. From there, negotiations will be made between the lender, the defaulted party, and the potential buyer.
A Foreclosure Auction is Held
Foreclosure auctions can be held at any point after the minimum 3 week advertisement period has passed. Some foreclosure sales happen very quickly, and others can take years depending on individual circumstances.
Depending on the state you live in and the type of foreclosure, foreclosure auctions either happen at an approved government facility, online, or at a designated auction space. Most foreclosure auctions are conducted live in front of county courthouses, but most states only require a publicly accessible space, such as a hotel ballroom or convention center. It’s possible, depending on the state, that hundreds of properties might be auctioned off in a single day.
The public is allowed to attend any auction they so choose, and anyone can bid on any property at the auction, however, as a buyer, there are steps you should take before bidding on or purchasing the property.
First and foremost, you need to come prepared with your finances in order. To take advantage of foreclosure sales, you should get pre-approved for a home loan before the date of the auction. After the lender reviews your income, assets, and credit history, if you’re accepted, you will receive a tentative approval letter stating that your mortgage is approved for a certain amount of money. Take this proof with you to auction.
It’s also important that you understand that the price of an auctioned home usually includes the loan balance, associated lawyers’ fees, and any other costs that are related with the foreclosure. You should be prepared to put down a modest deposit, and an understanding that prices are, for the most part, non-negotiable.
It’s also important to understand that many of these houses are sold “as-is” so you may not be able to inspect the property until the title is in your name. In some cases, after buying a foreclosed property, you will have to put a significant amount of effort into renovations and repairs.
Post-Foreclosure Redemption Period
If you’re a homeowner whose home has been sold at a foreclosure auction, there are still options available to you to retain your property. Post-foreclosure redemption periods allow homeowners to reclaim their homes after foreclosure sale.
As per the U.S. Department of Housing and Urban Development, “Many states have some type of redemption period. The redemption period and availability is often determined by whether the foreclosure is judicial or non-judicial. And, timelines and procedures can vary greatly from state to state. You can find specific information about the redemption period of your state (if applicable) by reading the state laws on foreclosure.”
During this period, homeowners will need to be prepared to pay the outstanding mortgage balance, as well as all the fines and fees that have occurred throughout the foreclosure process.
Foreclosed Home Becomes Real Estate Owned Property (REO Foreclosure)
If the property up for auction does not sell, it is repossessed by the lending institution, at this point the property becomes Real Estate Owned (REO).
The other way a lending institution can obtain an REO is by accepting a “Deed in Lieu of Foreclosure.” In these instances, the homeowner transfers the deed to the lender in exchange for the foreclosure being closed. Doing so does not benefit the borrower unless the process is completed before the foreclosure is filed. In these cases, foreclosure will not impact the borrower’s credit report.
Once a property becomes an REO, the property becomes a part of the bank’s portfolio of owned properties, which they put on the market in order to mitigate their losses. These homes are typically sold in conjunction with local realtors, with the intent that these homes are to be sold “as-is” and as quickly as possible.
If you recently bought a residential property through foreclosure, you’ll need to determine if the tenants living on the premises are the former homeowners who neglected to make payments, or if the tenants were renting the property from the former homeowners. This will affect your course of action for eviction.
If the property purchased is occupied by the former owner, you can evict the owner through what is known as a formal eviction process (NRS 40.255(1).) A formal eviction starts by the landlord serving the tenant with an eviction notice. This gives the previous homeowners 3 business days to vacate the property. If the former owners do not comply by the end of the notice period, the new homeowner can serve the tenant with a summons and a complaint for Unlawful Container that asks the court to award the new homeowners possession of the property.
If the people occupying the home are renting the property, however, it’s important to understand that a property sale does not change the terms of their lease agreements. Therefore, it’s likely that the lease that’s in place before you purchase the property remains in effect even after you close on the home. Even after all the paperwork goes through, you cannot legally raise the rent, modify agreements, or evict a tenant before the terms of their lease have been completed. You can, however, offer to break the lease with the tenants, in essence buying them out. This doesn’t mean that the tenant is obligated to accept your new terms.
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