Mortgage loans can be extremely intimidating for those who have never had one. In many cases, they’re even intimidating for those who have had them before. A home purchase is a huge financial step for someone to take, and is not something to be taken lightly. Buying a home is typically the largest purchase that the average person ever makes, and the majority of home buyers rely on impressively large mortgages in order to purchase their homes.
While mortgages are typically an essential part of the home purchase process, getting a mortgage is rarely ever a simple process. There are a wide variety of mortgage programs and home loan packages to consider, and an almost overwhelming number of lenders, brokers, and loan originators to consult when looking for a mortgage loan. Different loans and lenders have different criteria for borrower eligibility, and it can be quite a headache for any home buyer to decide which one is right for them.
In general, eligibility requirements for home loans serve to help protect lenders, and are in place to help ensure that if a borrower qualifies for a loan, they will be able to pay for it. Again, home loans typically offer extremely large sums of money, using real property as collateral. However, they must be paid back (with interest), just like any other loan. Home buyers are solely responsible for repaying mortgage debt obligations by end of the agreed upon loan term.
Of course, life can be unpredictable in the best of times, and sometimes, financial hardships can get in the way of repaying a mortgage. Many homeowners today fear this exact situation, and with good reason. Defaulting on a mortgage loan can lead to a homeowner’s worst fear: losing their home in a foreclosure.
What is Foreclosure?
Foreclosure is a legal process exercised by lenders and banks when a homeowner fails to make the required mortgage payments for a property. In defaulting on the mortgage loan, the borrower forfeits their right to ownership of the property (which acts as collateral for the loan amount), which is then seized by the bank/lending institution that originated the mortgage as a way of minimizing loss.
How Does Foreclosure Work?
Before being able to fully understand how foreclosure works, it’s important to understand how mortgages work. Mortgages are loans that use real property as collateral against a borrowed sum of money. The amount generally correlates to the value of that property, and the borrower is allowed to live in the home so long as payments are made toward the principal loan amount, with interest.
While the mortgage is active, the deed to the property is held by the lender throughout the loan term until the borrowed amount and all interest and associated costs are paid in full. Once the final payment is made, the deed is then transferred to the borrower, who assumes full ownership of the property.
At any point during the loan term, if the monthly mortgage payments cannot be made, and the borrower defaults on the home loan, then the deed remains in possession of the lender, who can legally take back ownership of the home used as collateral, in order to cover their loss. The process by which this occurs is what is known as foreclosure.
The Foreclosure Process
The foreclosure process only becomes a possibility when a homeowner fails to make a mortgage payment on time, which renders the loan as delinquent. Should the borrower completely miss the payment and defaults on the loan, the foreclosure process can begin. When a homeowner defaults on their mortgage, they should be sent a notification by their lender. Usually, borrowers are given a grace period to try to make up for any missed payments and are typically charged late fees on top of whatever money is owed.
If the borrower is unable to make those missed payments, and the mortgage remains delinquent after three to six months, then the lender will officially begin the foreclosure process on the property. Sadly, the more time that a borrower has spent in delinquency without making any payments, the harder it is for them to catch up with the mortgage payments, making it overwhelmingly hard to stop the foreclosure process.
Homeowners should be aware that the details of the pre-foreclosure and foreclosure process vary by state. In pre-foreclosure, a lender may present alternatives to foreclosure through different methods of mediation to negate any negative consequences towards both parties such as mortgage modification, or sometimes even mortgage release.
In general, there are two main avenues of foreclosure, depending on the state that a homeowner is located in: judicial foreclosure and power of sale (sometimes called non-judicial foreclosure). Judicial foreclosure requires lenders to get the local legal authorities involved for permission to foreclose on a property. The lender must be able to prove that the borrower has defaulted and remains delinquent on mortgage payments before the local sheriff is able to auction off the property or before ownership reverts back to the bank in order to sell the property to cover their financial loss.
Non-judicial foreclosure or “power of sale” is a much less strict process, and allows banks direct access to foreclose on the property without the involvement of the court system, unless the homeowner decides to pursue legal action against the lender.
Regardless of how it may seem, foreclosure is not always beneficial for the lender. As a matter of fact, many lenders would rather try to keep the foreclosure process from happening at all. In many cases, lenders will instead opt to offer the borrower alternate means of resolving the issue instead of going through with the full foreclosure process.
Pre-Foreclosure
The state of pre-foreclosure is a specific period of time early in the foreclosure process. Technically, pre-foreclosure is when the bank is in the infant stages of repossessing the property. The pre-foreclosure period begins when the lender files a default notice on the property, effectively notifying the borrower that legal action will be pursued by the lender should the borrower not submit the delinquent payment.
During pre-foreclosure, the homeowner can still submit the delinquent payment in the allotted time and prevent the property from being foreclosed.
Homeowner’s Options During Pre-Foreclosure
Pre-foreclosure is a period that can last anywhere between 3 to 10 months. During this period of time, there are a few options available to homeowners that may prevent a foreclosure.
Probably the most obvious option, which might not exactly be the easiest option, is to make any delinquent payments. This would also mean paying any associated delinquency/late fees. The difficulty behind this option is directly tied to the homeowner’s current financial situation since this option would mean somehow acquiring a significant amount of money in a short period of time. Besides which, typically the financial hardship that caused a homeowner to default in the first place typically lasts well into the foreclosure period, and in most cases, if the payments have gone unpaid long enough, this method is all but impossible.
Another viable option would be for the homeowner to try to quickly sell the property before the home officially goes into foreclosure. This kind of sale is what is often referred to as a short sale. Short sales are known to be a favorable option for both the seller, home buyer, and the lender. The homeowner/seller gets the chance to save their credit score and be much better suited to find a new place to live, the bank/lender gets to transfer the mortgage to the new buyer and prevent themselves from having to pay the costs of foreclosure, and the buyer gets a great deal on a new home.
Short sales are generally private arrangements between the homeowner and a buyer, under the one condition that the buyer’s offer is approved by the bank that holds the mortgage before the sale is finalized. This is a saving grace for many home sellers in this position since investors who hunt for short sales are fairly easy to find.
Judicial Foreclosure and Power of Sale
When it comes to the foreclosure of a home, some states allow lenders to sell the property without going through the court system, using a provision in a mortgage agreement called “power of sale.” States which don’t allow power of sale force lenders to attempt the judicial foreclosure process in order to repossess and eventually sell the property.
States That Only Allow Judicial Foreclosure:
Currently, there are 22 states in the U.S. that only allow banks the option of judicial foreclosures. These states include Arkansas, Connecticut, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, Virginia, and Wisconsin.
States That Allow Power of Sale:
There are 28 states (and the District of Columbia) that allow power of sale. These include Alabama, Alaska, Arizona, California, Colorado, Georgia, Hawaii, Idaho, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia and Wyoming.
How Power of Sale Actually Works
Every state that allows foreclosure through power of sale has slightly different rules when it comes to the process. Even so, there are a few things that must happen that are typically necessary for it to occur, including:
The borrower has defaulted by failing to make payments
The lender must provide limited notice of the foreclosure
After a specific period of time has passed (after the homeowner being notified of the foreclosure), a third party trustee can sell the home at a foreclosure sale or auction.
Power of sale is typically the worse method between the two for homeowners, since it limits the amount of time they have before a foreclosure sale occurs. That being said, it can still have a few upsides. For example, some states do not allow lenders the option of seeking out a deficiency judgment after exercising power of sale. When proceeds from a foreclosure sale don’t fully cover the outstanding amount of the loan, the remainder is called the deficiency. A deficiency judgment is a personal legal judgment allowed in some states that permits a lender to sue the borrower for the amount of their deficiency. Additionally, in states with power of sale, borrowers can still seek judicial review of the foreclosure, although it will require the borrower to file a lawsuit against the lender, which may be an expensive venture.
In many states, any homeowner whose home has been sold in a foreclosure sale (whether through power of sale or judicial foreclosure), are allowed something called statutory redemption. Statutory redemption is a period of time in which the borrower can reclaim their home, providing they are somehow able to pay the full price of the home as it was sold in the foreclosure sale. The time period granted for statutory redemption usually varies from six months to one year. Typically, the homeowner is permitted to occupy the property during this period.
Avoiding Foreclosure: Know your Options
Foreclosure is a situation that should be avoided at all costs, though that is way easier said than done. No homeowner can predict their financial future, and some things are just out of our control. Foreclosure is a survivable situation, but a quick-thinking homeowner with the right knowledge can sometimes avoid it altogether. Avoiding a foreclosure is almost always leaps and bounds better for a homeowner's finances, as well as their family (if they have one).
Even when armed with the right knowledge and enough time to act quickly, there really is no “get out of jail free” card when it comes to foreclosures. There are no shortcuts, only hard choices with costs and/or repercussions that must be considered thoroughly. And while predicting the future is an impossibility, home buyers must always consider whether or not they will be able to afford the home that they wish to purchase if a hardship should occur. Planning for failure is always a better option than failure to plan.
For homeowners who find themselves face to face with the threat of foreclosure, the most important thing is not to panic. Lenders hate the foreclosure process almost as much as homeowners do, as it can be quite costly for them as well. This is why many lenders extend help to homeowners, even up until the very last minute.
As it stands, there are quite a few options for homeowners looking to avoid foreclosure. Again, they are not exactly “forgive and forget” methods, or some wave of a magic wand that makes the situation disappear. They are simple solutions that can help prevent the truly bad outcome that is foreclosure. Some options homeowners have to prevent foreclosure are:
Refinance
Refinancing a mortgage has always been a way for homeowners to attempt to replace their current mortgages with home loans that are more affordable. As it pertains to foreclosures, refinancing is a preventative measure that would have to be taken long before things get out of hand. It takes a quick-witted homeowner to discern when refinancing can help them avoid foreclosure.
Even so, refinancing is essentially getting a new mortgage. That includes qualifying for a new home loan and being able to cover any closing costs required. If fear of foreclosure is the driving force behind a refinance decision, these things may already be out of reach. Still, there are some amazing loan programs in existence that could really help get homeowners on track, like FHA loans with their killer affordability and lax eligibility requirements, VA loans which arguably have some of the best loan terms in existence for current and retired members of the US military, or even some USDA Loans that carry next to nothing in upfront costs for home buyers in rural areas.
Refinancing to avoid a foreclosure is keeping well ahead of the game, but in the end, may only prolong the unwanted end result. Homeowners must be aware that a new mortgage, while more affordable than the last, may not be enough to keep them out of trouble. Homeowners should speak with their lenders before any refinancing decision is put into action.
Reinstatement
At almost any point in the foreclosure process (up until the property is seized from the homeowner), simply paying the money owed along with any late/delinquency fees charged by bank can stop a foreclosure dead in its tracks. The method is known as reinstatement, and is typically one large payment made by the homeowner to make the mortgage current. Reinstatement is sometimes the best option for homeowners who have found their way out of a rough financial situation, as they get to continue paying for and living in their home.
Reinstatement can be the hardest method to accomplish, since the hardships that cause homeowners to not be able to afford their mortgages typically don’t just disappear. Most of the time, the amount of money that is owed, along with the fees charged for missing the payments is just too much money for a homeowner to amass in one shot. Homeowners who are considering reinstatement need only to request a reinstatement quote from their lender, and pay that amount in full by the date given.
Repayment Plan
Under certain circumstances, a mortgage lender may be willing to set up a repayment plan with homeowners who can afford it. Through a repayment plan, the delinquent amount is broken up over a set period of time and added to the standard monthly mortgage payment amount for the length of that time period. Typical repayment plans give homeowners a choice between 3,6, and 9 months.
Repayment plans work best when the delinquent amount is not ridiculously high. Depending on the repayment period granted, the standard monthly mortgage payments become a little higher, and the homeowner gets a chance to make the mortgage current with much less damage to their credit. Even so, larger monthly mortgage payments may only make things worse for the homeowner, so this method is not really an option for some.
Forbearance
Another option offered by many mortgage lenders is forbearance. Through forbearance, homeowners are given either a temporary suspension or temporary reduction of their monthly mortgage payments. The idea is to allow them a grace period to try to get their finances back on track, without having to worry about their mortgage payments. Forbearance is surprisingly helpful for many, particularly those who lost their jobs and could use the period of no mortgage payments to hunt for a new source of income without worry.
Home buyers considering requesting forbearance should note that the suspension or reduction is only a temporary fix. Only in the absolute rarest of cases do companies release borrowers from delinquencies free and clear, so you can count on any payments that were suspended or any reduction amounts to be due at a later date. In fact, forbearance can actually be a danger to some homeowners, as many forbearance deals come with a balloon payment that might be hard to afford on its own, and might even put a homeowner back at risk for foreclosure.
Short Sale
In some cases, homeowners are actually able to sell their homes at a price that is enough to satiate the mortgage lender and free the homeowner from the threat of foreclosure. When done correctly, these “short sales” can be an effective method for keeping homeowners in decent enough standing financially to get another mortgage loan relatively quickly, if they felt they were ready to start over. In a short sale, homeowners find a buyer willing to purchase the property at an incredibly reasonable price (below the market value) that the lender will accept, and in doing so, resolve their debt obligation, and move on with very little damage to their credit.
Though technically a loss for the homeowner, a short sale is still a better outcome than a foreclosure. It isn’t particularly hard to sell a property through a short sale either since there are usually dedicated short sale hunters ready to pounce on a great deal in most places. Better still, some conventional mortgage programs are designed to be available to homeowners who sold their homes through a short sale in as little as two years, as opposed to the 7 years that a homeowner whose property was foreclosed is typically required to wait.
Mortgage Modification
One of the best options for avoiding foreclosure is is a mortgage modification. Mortgage modification is similar to a refinance, except that the terms of the mortgage are altered, rather than the mortgage being replaced with an entirely new home loan. The best part is that there is really no shortage of lenders who are willing to extend mortgage modification options to borrowers, since they are generally less expensive to them than a foreclosure.
Mortgage modification is an agreement between a homeowner and a lender to modify the terms of the mortgage loan in an effort to make the mortgage more affordable. Common modifications include one or a combination of the following: permanently or temporarily reducing the interest rate, extending the loan term, adding the delinquent payment amount into the principal balance due, and changing the loan type (usually from an adjustable rate mortgage to a fixed rate mortgage). Mortgage modifications are a great way for eligible homeowners who can prove their financial hardships to resolve their delinquency issues and continue living in their home with more affordable mortgage terms to help ensure the affordability of the loan going forward.
Chapter 13 Bankruptcy
Declaring bankruptcy may feel like admitting defeat, but sometimes it’s unavoidable. Homeowners who find themselves deep in a period of financial hardships may have no other choice. Still, depending on the circumstances, filing for chapter 13 bankruptcy may be an option that allows homeowners to keep their homes.
With chapter 13 bankruptcy, lenders are required to halt any impending foreclosure proceedings. In most cases, homeowners are given a period of time to fix their finances and repay the lender before any action can be taken. In some states, borrowers have up to 5 years to resolve their delinquencies, and even then, some states require the lender to actually file a lawsuit against the borrower in order to collect the money owed.
Mortgage Release
When all else fails, sometimes the best thing to do when faced with foreclosure is to just walk away. A mortgage release gives a homeowner a legal means of doing so, while ridding themselves of their debt. A mortgage release isn’t always an option for financially stressed homeowners, but for those who feel it may help them, a mortgage release may be possible with cooperation between the lender and the homeowner.
With a mortgage release, also known as “deed in lieu of foreclosure”, the homeowner relinquishes ownership of the property to the lender, and the lender agrees that the homeowner is will now be free from the mortgage debt, including all future payments. In return for literally giving up all of the equity that may be in the home, the homeowner has a better chance of repairing their credit. In addition, they may also be granted a grace period of time to occupy their property while searching for a new place to live. A mortgage release can be accomplished much faster than waiting around for a short sale to go through.
Foreclosure: In Review
Buying a home is a huge investment, both financially and emotionally. That's why a foreclosure can be devastating for homeowners who are facing financial hardships. Through the foreclosure process, lenders are able to seize ownership of a property when the borrower has defaulted on their mortgage.
Lenders can foreclose on a home through either the judicial foreclosure process or power of sale, depending on the state in which the home is located. Either way, when a borrower is delinquent with their mortgage payments and is notified of an impending foreclosure, they must act fast to prevent that result from occurring. Luckily, there are a few things that homeowners can do to avoid foreclosure.
Depending on how early a homeowner can determine the need to take action, something as simple as refinancing can help prevent a foreclosure. If things are already going downhill, a homeowner must decide whether or not they can (or want to) keep the house. The options that allow homeowners to keep their homes, like setting up a repayment plan or a mortgage modification, typically require the homeowner to have gotten over their financial hardships in order to afford their mortgage and home.
If losing the home doesn’t seem like too much of a problem, homeowners can always try to request a mortgage release or sell the home in a short sale. Both options absolve the homeowner of their mortgage debt, but at the cost of any equity they may have built up and the property itself.
If you are concerned about being able to afford your mortgage and are worried about the threat of foreclosure, the first thing you should do is contact your lender to discuss your options. Avoiding foreclosure is easier the faster you can take action. If you have any questions that may help you to make a more informed decision regarding how to avoid foreclosure, then you can always call a home.loans mortgage specialist for a risk free consultation.