Foreclosure is the process that lenders use to take back a house from borrowers who can't pay their mortgages. By taking legal action against a borrower who has stopped making payments, banks can try to get their money back. For example, they can take ownership of your house, sell it, and use the sales proceeds to pay off your home loan. Understanding why foreclosures occur and how they work can help you navigate, or preferably avoid, the complex process. Show
Key Takeaways
Why Foreclosures OccurWhen you buy expensive property, such as a home, you might not have enough money to pay the entire purchase price at once. However, you can pay a small percentage of the price up front, usually anywhere from 3% to 20% of the price, with a down payment, and borrow the rest of the money, to be repaid in future years. However, the rest of the money may still amount to hundreds of thousands of dollars, and most people don’t earn anywhere near that much annually. Therefore, as part of the loan agreement, you will agree that the property you’re buying will serve as collateral for the loan. If you stop making payments, the lender can foreclose on the property—that is, repossess it, evict you, and sell the property used as collateral (in this case, the home) in order to recover the funds they lent you that you cannot repay. To secure this right, the lender places a lien on your property. To improve their chances of recouping the money that they lend, they (usually) only lend if you’ve got a good loan-to-value (LTV) ratio, a number that represents the risk that the lender will take in granting someone a secured loan, such as a mortgage. To calculate the ratio, the lender divides your loan amount by the value of the home and then multiples the result by 100 to get a percentage. Lenders view an LTV ratio of 80% or less to be ideal. NoteIf you have an LTV ratio that exceeds 80%, you will generally require Private Mortgage Insurance (PMI), which can add tens of thousands of dollars to the amount you pay over the loan term. How Foreclosures WorkForeclosure is generally a slow process. If you make one payment a few days or weeks late, you’re probably not facing eviction. However, you may face late fees in as little as 10 to 15 days. That's why it’s important to communicate with your lender as early as possible if you’ve fallen on hard times or expect to in the near future—it might not be too late to avoid foreclosure. The foreclosure process itself varies from lender to lender and laws are different in each state; however, the description below is a rough overview of what you might experience. The entire process could take several months at a minimum. Notices start. You will generally start to receive communications as soon as you miss one payment, and those communications might include a notice of intent to move forward with the foreclosure process. In general, lenders initiate foreclosure proceedings three to six months after you miss your first mortgage payment. Once you’ve missed payments for three months, you may be given a "Demand Letter" or "Notice to Accelerate" requesting payment within 30 days. If, by the end of the fourth month of missed payments, you still have not made the payment, many lenders will consider your loan to be in default and will refer you to the lender's attorney. This is when things get critical. Read all of your notices and agreements carefully and speak with an attorney or a U.S. Department of Housing and Urban Development (HUD) housing counselor to stay in the know. A judicial or nonjudicial foreclosure ensues. When it comes to foreclosure proceedings, there are two types of states: judicial and nonjudicial states. In judicial states, your lender must bring legal action against you in the courts to foreclose. This process takes longer, as you often have 30 to 90 days in between each event. In nonjudicial states, lenders can foreclose based on the "power of sale" clause in the agreements you’ve signed with them, and a judge is not involved. As you might imagine, things move much faster in nonjudicial states. But in either type of state, you will be given written notice to make payment followed by a "Notice of Default" and a "Notice of Sale."You can fight the foreclosure in court; in a judicial state, you’ll generally be served with a summons, whereas in a nonjudicial state, you’ll need to bring legal action against your lender to stop the foreclosure process. Speak with a local attorney for more details. You can stop the process. In certain states, lenders are required to offer borrowers the option to reinstate the loan and stop the foreclosure process. Whether or not those options are realistic or feasible is another matter. Lenders might say that you can reinstate the loan anytime after the "Notice of Sale" up until the foreclosure date (the sale date) and stay in the home if you make all (or a substantial portion) of your missed payments and cover the legal fees and penalties charged so far. You might also have an opportunity to pay off the loan in its entirety, but this may only be feasible if you manage to refinance the home or find a substantial source of money. Be prepared for an auction and eventual eviction. If you’re unable to prevent foreclosure, the property will be made available to the highest bidder at an auction that either the court or a local sheriff's office runs. If nobody else buys the home (which is common), ownership goes to the lender. At that point, if you’re still in the house (and haven't made arrangements to protect the house), you face the possibility of eviction, and it’s time to line up new accommodations. Local laws dictate how long you can remain in the house after foreclosure, and you should receive a notice informing you of how long you can stay. Ask your former lender about any “cash for keys” incentives, which can help ease the transition to new housing (assuming that you’re ready to move quickly). Get a second chance through a redemption. Many states offer what is known as redemption, a period after the foreclosure sale occurs when you can still reclaim your home. The "Notice of Sale" will generally inform you about the redemption period, and timeframes vary by state. You generally must be willing to pay the loan balance that you owe and any costs associated with the foreclosure process to reclaim in the home. NoteIt often takes four months after you miss your first payment before you are officially in default of your loan. Consequences of a ForeclosureThe main outcome of going through foreclosure is, of course, the forced sale and eviction from your home. You’ll need to find another place to live, and the process could be extremely stressful for you and your family. How foreclosures work also makes them expensive. As you stop making payments, your lender may charge late fees, and you might pay legal fees out of pocket to fight foreclosure. Any fees added to your account will increase your debt to the lender, and you might still owe money after your home is taken and sold if the sales proceeds are not sufficient (known as a "deficiency"). A foreclosure will also hurt your credit scores. Your credit reports will show the foreclosure starting a month or two after the lender initiates foreclosure proceedings, and it will stay on the report for seven years. You’ll have a hard time borrowing to buy another home (although you might be able to get certain government loans within one to two years), and you’ll also have difficulty getting affordable loans of any kind. Your credit scores can also affect other areas of your life, such as (in limited cases) your ability to get a job. How to Avoid a ForeclosureThe act of taking back your home is the last resort for lenders who have given up hope of being paid. The process is time-consuming and expensive for them (although they can try to pass along some of those fees to you), and it is extremely unpleasant for borrowers. Fortunately, you can follow some tips to prevent foreclosure:
Frequently Asked Questions (FAQs)Which will keep you in your house longer, foreclosure or a short sale?Both foreclosures and short sales will result in the loss of your current home, but there are differences. Foreclosures can involve a long legal process, and that may give you some extra time in your home, but once the foreclosure is complete, you may be required to leave immediately. Short sales give you a bit more flexibility to negotiate the terms of the sale. How do you buy foreclosed homes?Foreclosed properties can be purchased at auction. These auctions may take place at local courthouses, private auction companies, convention centers, or online. The proceedings for these auctions will depend largely on local law and whether the state allows for judicial foreclosures. How long is the foreclosure process in Florida?The Length of the Florida Foreclosure Process Timeline can vary. Generally, it lasts between 8 to 14 months. On the other hand, if you hire a Foreclosure Defense Attorney, it can take longer.
How does foreclosure work in North Carolina?When you are behind on your mortgage, the lender will instruct the trustee to foreclose. After verifying that you are behind, the trustee then files a "special proceeding" at the county courthouse and also sends you notice. A "foreclosure hearing" is held first and takes place at the county courthouse.
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