Avoiding Foreclosure: What are your options?
Foreclosure is a process wherein your home or real estate property is re-acquired or repossessed by the lender to recover the amount you owe. Foreclosing properties usually happens when homeowners fail to make the appropriate monthly payments. However, avoiding foreclosure is not at all impossible. This article will cover possible options that you can do to prevent your property from being foreclosed.
Foreclosure Process Explained
Foreclosure is a process done legally wherein the mortgagee obtains a "termination of the equitable right of redemption" by court order. Foreclosure happens after all attempts to recover a loan balance from on the property are exhausted, forcing the lender to sell the property to someone else to cover their losses.
When a borrower applies for a loan, the lender obtains collateral in the form of real estate property. If the borrower defaults or fails to pay the agreed amount in the "deed of trust" or mortgage agreement, the lender will have the right to repossess and sell the property and keep the sale's proceeds paid for the mortgage and other legal fees. If the property's sale is not enough to cover the existing balance, the lender also has the right to file a deficiency judgment. In most US cities, the principal balance items are the principal loan, accrued interests, and legal fees.
Foreclosure varies from state to state but generally follows three timelines: initial missed payments, scheduled sales, and redemption period. It can also happen fast or may take years for the actual foreclosure date.
Initial Missed Payments on Mortgage
There are times that homeowners may miss paying their monthly mortgage payments. Foreclosure starts within 16 days after a missed payment. During this time, the lender will send notices through phone, regular post, or email, advising the homeowner that the payment is due and suggesting viable options to bring the payment up-to-date.
On the 30th day after the due date, the mortgage enters delinquent status, and attempts for collection of payment will start. The homeowner will receive repeated attempts by phone or email. The owner needs to confirm that they acknowledge the loan within 36 days after the due date.
Forty-five days after the loan due date, the lender will provide homeowners with possible options to avoid foreclosure and attempt loan reconstruction. If the homeowner makes no effort, the lender will start the formal foreclosure process 120 days after the payment due date. State rules on when and how long the foreclosure will proceed will now vary depending on property jurisdiction.
Scheduled Sale of Foreclosed Property
The foreclosure schedule comes after it is ruled by the court that the property owner has been delinquent and that either the owner cannot pay or have refused any offer of refinancing to get the property paid.
During this period, the homeowner can still negotiate with the lender to keep the property. The negotiation would be full payment of the loaned amount and all legal costs before the actual scheduled sale.
Generally, the borrower may still be able to keep its property if it can negotiate a settlement with the lender (e.g., pay the full amount due, court costs, receiver costs, attorney's fees, etc.) before the sale date.
Included in the scheduled sale of the foreclosed property are the following:
Notice of Sale
Once a property is scheduled for sale, the lender needs to notify the homeowner of the sale date, time, and place. Although states may differ, the notice is either mailed to the homeowner, posted in signage in front of the house, published in local newspapers, or distributed in pamphlets.
Foreclosure Sale, Objections, and Certificate Issuance
In the foreclosure sale, anyone may bid at the auction, and bidders are required to bring proof of income to show that they can pay the full amount for the property that they won through bidding. The bidding occurred on the date and placed identified in the notice of sale and may be postponed or delayed, depending on the foreclosure agreement's rulings.
Some states allow objections to the sale, and the court can allow a specific period to pass before allowing the sale to push through. After the bidding, the winning party will receive a certificate of title or deed of trust. This certificate will give him rights to the property, but the transfer will not be complete until all objections have been resolved or until after the redemption period.
Disbursement of Proceeds and Eviction
After the property's sale, the proceeds will be disbursed in the order of priority: Foreclosure expenses, lender's money judgment, and junior liens. Any remaining proceeds will then be forwarded to the borrower. Once the property is paid, the bidder is given ownership, and the owner will relinquish all rights to the property. If the previous owner denies possession of the property, an eviction notice will be sent out by the court of jurisdiction, and the owner will be denied rights of redemption.
The redemption period refers to the borrower's right to regain ownership of the property after the foreclosure by paying the bidder the sale price plus additional costs incurred after the transfer. Redemption is not available in all US States and may also be denied because of the following conditions:
- Refusal to surrender the property to the new owner
- Abandoning the property before the foreclosure period
- Owing to the lender more than the amount derived from the foreclosure sale
- Previous owner's capacity to pay the new mortgage
- If against the terms of the mortgage or deed of trust
Steps in Avoiding Foreclosure Sale
Foreclosure is the last option for most homeowners. In most US cities, The Federal Housing Administration (FHA) allows homeowners to extend or reverse mortgages, depending on circumstances. They can offer delayed payments for up to six months, propose deferred payment methods, or provide relief in case of disasters or natural calamities.
Additionally, there are many options that homeowners can do to prevent actual foreclosure. Here are a few things that homeowners can look into to avoid foreclosure
Refinancing refers to the process of paying the existing mortgage from the funds of a new mortgage. It's an excellent way to acquire funds for property improvements or pay off a delinquent mortgage. The downside to refinancing is obtaining a debt on top of debt. Meaning, you will be incurring monthly payments for both the current and new mortgage.
When the homeowner cannot pay off the mortgage and the property is scheduled for sale, foreclosure can still be avoided by selling the property for less than the mortgage, and all proceeds will then go to the lender. In turn, the lender can either forgo the remaining balance or ask the homeowner to pay the difference between the sale price and the loaned amount.
Temporary and localized arrangement with the lender
In most cases, this is the best option to avoid foreclosure. If the homeowner doesn't want the risk of foreclosure, an arrangement can be made with the lender outside of the judiciary. These kinds of arrangements are temporary, giving the borrower relief for a given period. It may or may not involve additional fees, rearrangement of payment schedules, or late payments.
Alternate financing is a home loan with an adjustable-rate mortgage. It differs from fixed-rate mortgages in terms of payment schedules and interest rates. The disadvantage of alternate financing is that for loans like negative amortization or interest-only mortgage, the loaned amount is not paid. When the property loses value, homeowners can face a loan that is more than the value of their property. Additionally, the interest rate for these kinds of mortgages reset after a certain period and can increase your monthly payment to balloon proportions.
There are two types of bankruptcy, and each one can affect your mortgage differently. The only downside to applying for bankruptcy is that it affects your credit score and lessens your eligibility for future home loans. To be considered for another mortgage in the future, a court needs to release a bankruptcy discharge, virtually eliminating all your debts. However, these are still viable steps in avoiding foreclosure.
If you file for bankruptcy and your home is exempted, you need to continue paying your mortgage or risk foreclosure. This type of bankruptcy does not provide a method to arrange or pay for your home loan.
You will continue paying your mortgage even with an approved bankruptcy. However, you can pay off the monthly dues through the repayment plan, lasting from 3-5 years. As long as you are current with the plan payments, the lender cannot start to foreclose, and this will allow you more time to catch up with your delinquent payments.
When you want to avoid foreclosure, the important thing to consider is to be informed of all your legal rights as a consumer and homeowner. Many government agencies can help you decide the best course of action to avoid losing your homes. Furthermore, avoid scamming lenders out to get your property and offering you less than the value of your property. Seek legal help as early as possible.