How Foreclosure Works
In 2008, over 860,000 American families lost their homes due to foreclosures and nearly 3 million received foreclosure notices. In 2009, the statistics were just as dire, as families across the country struggled to find their feet during difficult economic times.
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Ten years later, in 2018, with the recession a thing of the past, fewer than 620,000 homes were foreclosed. Although much lower than the figures of a decade prior, this is still a huge number of foreclosures when you consider the heartbreak that each foreclosure action can bring.
But how does this process work, what can you do to avoid foreclosure, if anything, and what power does your lender have over you during this time?
What is Foreclosure?
The foreclosure process differs from state to state, but it generally entails the lender taking possession of the property because the borrower failed to meet the mortgage payments and defaulted on their debt.
A mortgage is a secured debt because it is “secured” against the house. If you don’t meet your payment obligations, the lender will seek to secure control of that asset. It sounds like a cruel and heartless thing to do and kicking a family out of their home is certainly not going to win them a Nobel peace prize, but it can also be seen as a simple contractual agreement.
They give you the money to buy the house on the agreement that you will pay them a fixed sum every month. If you don’t make those payments, you break that agreement, and they take back the house that they basically paid for.
There are two types of foreclosure:
- Judicial Foreclosure: The lender and the homeowner go to court and present their cases.
- Non- Judicial Foreclosure: Does not require court action and may begin with a simple written notice.
None of this can happen without your knowledge. The lender is required to notify the homeowner about proceedings, the exact timeframe of which is dictated by state law.
Some states also insist on mediation prior to foreclosure, during which time the borrower can make their claim and request a delay of mortgage payments or some assistance with those payments.
What Happens in a Foreclosure?
The foreclosure process won’t begin as soon as you fall behind on your mortgage payments. In most states, you need to be at least 120-days behind for this to become a real threat.
If you miss four monthly payments, the foreclosure process will begin with something known as a Notice of Default. For every 1 foreclosure, there are at least 4 or 5 of these letters issued. You generally have between 2 and 3 months to reinstate the loan once this letter has been received, after which the foreclosure process will stop and you can continue paying the mortgage as normal.
This is known as the redemption period, during which time you can redeem the property by reinstating or repaying the loan. All states allow for this period to take place and in some states, it occurs after the foreclosure has been completed. The exact timeframe of foreclosure and the length of the redemption will depend on the type of foreclosure and your location.
The vast majority of borrowers do not redeem the property prior to the sale. Simply put, if they had the money to make the redemption, they wouldn’t be in that mess in the first place. However, redemptions are more common (when allowed) after the foreclosure sale.
Preforeclosure vs Foreclosure
To hasten the foreclosure process, a bank enters into preforeclosure when the borrower is 90-days behind on their payments. If another month passes without payment, the actual foreclosure process will begin, and the real troubles will commence.
A house in preforeclosure can still be saved. Contact your bank during this time and they will tell you what your options are and what you need to do to save your home.
Options When Facing Foreclosure
When facing foreclosure, your first call should be to your mortgage lender. Your lender is not the bad guy in this situation. Sure, they are the one causing all the stress and anxiety, but they’re also the reason you have a house in the first place.
It’s important to remember that they’re just in it for the money and foreclosures are expensive, with banks losing an average of $50,000 per sale. Not only will they lose money selling the home for less than it is worth, but they’ll be tasked with filling lots of paperwork, protecting and maintaining the home, and securing it against vandalism and squatters.
Their main goal, therefore, is to keep those mortgage payments alive and they are usually happy to work with you to make this happen.
Do whatever it takes to escape this period, make the necessary payments, and keep your home. If you can’t arrive at a suitable agreement with the lender, ask friends and family for help, sell other assets or take out a small loan. Using one debt to pay for another is nearly always a bad idea, but not when that other debt is your home and you stand to lose it if you don’t pay.
Mortgage debt is generally classified as “good debt”. Yes, the interest is high when calculated over the term, but in return you get a valuable asset, one that can provide you with equity loans, equity lines of credit, and eventually give you something you can pass onto your heirs.
Not only is it important that you keep that mortgage alive for the sake of your home, but it will also protect your credit report, keep your credit score stable, and prevent credit-related issues in the future.
For more help, consult with an attorney or a HUD-approved housing counselor, who is trained to deal with issues like this. You should also make sure that you:
Don’t Bury Your Head
Debt won’t disappear just because you don’t pay attention to it. This is an issue that many debtors face. They bury their heads in the sand and hope that everything will somehow fix itself. But that will only make the situation worse.
Face the reality of what’s happening because your lender won’t think twice about foreclosing your home if you fall behind with the payments.
Tell Your Loved Ones
The shame of debt has crippled many Americans, preventing them from telling their loved ones. But again, this is only going to make the situation worse. Everyone makes mistakes, everyone falls behind and needs a little help.
Your loved ones can support you emotionally and financially—parents can lend money, siblings can take short-term loans. They’ll be there when you need them, and they will also understand when you refuse to join them for lunch because you simply can’t afford it. This kind of support could save you a lot of money and may even save your home.
Speak with Your Lender
As discussed above, your lender is not a soulless, evil organization out to take your home and your livelihood. Their goal is to save money, and foreclosures are expensive, so they’ll be as desperate to find a solution as you are, whether this comes in the form of a short sale or changes to your mortgage.
The sooner you contact them, the better. Don’t leave it to the last minute as they may be less willing to help you, deeming you to be irresponsible and reckless.
Prior preparation prevents poor performance. If you’re in trouble today, don’t just cross your fingers and hope for a magic resolution tomorrow. Plan ahead, analyze your incomings and outgoings, find the issue, and fix it sooner rather than later.
If you don’t yet have a mortgage and are worried about the risk of foreclosure when you have one, simply buy a house with a larger down payment. Whether this means getting a cheaper home, saving for more years or both, it can increase your equity from the start.
If you establish an emergency fund while meeting your monthly repayments and pay more than the minimum when you have extra cash, your principal will be smaller, your liabilities will be reduced, and your options will increase. It won’t necessarily save you, but it will certainly make things a lot easier.
Your real estate agent and lender can help you find an affordable house and establish a mortgage that you can repay without issue.
Consequences of Foreclosure
The higher your credit score is, the more damage a foreclosure will be, but it’s all relative and it’s always a serious issue. According to FICO, a consumer with a score of 780 will lose an average of 150 points, while a score of 680 could see a reduction of as much as 105 points.
The foreclosure will remain on your report for 7 years, beginning 180 days after your last successful payment. This can obviously have a massively negative impact on your chances of acquiring credit in the future. You can rule out purchasing any real estate for a few years at least and may be limited to high-interest rates when acquiring credit cards and personal loans.
However, the damage won’t last forever. Not only will it disappear after 7 years, but the damage will lessen over time, and after a few years you can start looking at purchasing real estate again.
Foreclosure: US vs the Rest of the World
The US financial system is somewhat unforgiving when it comes to missed payments and nowhere is this more true than with mortgages. Repossession may seem like a fact of life that every non-paying homeowner has to contend with, but it has actually been outlawed or restricted in other countries.
In Ireland, Australia, and New Zealand, it is prohibited, and while it is legal in the UK, it’s rare.
In all of these countries, there are systems in place that favor the consumer and give them a chance to get back on their feet, because a foreclosed home is not only detrimental to the homeowners, it’s also detrimental to society; it’s one more family in distress, one more family that could be made homeless.
But while the US foreclosure process seems incredibly unjust, it could be worse. The US system may look harsh when compared to the aforementioned developed nations, but it is relatively kind to consumers when compared to some of the others.
In Spain, for instance, failing to meet mortgage obligations can have severe consequences for the homeowner. They will be refused all secured loans and will become indebted to the bank for years. What’s more, the full mortgage debt will remain, cannot be removed in bankruptcy, and can cripple a debtor for the rest of their life.
We have it easy, by comparison, and the beauty of the US, even when compared to countries like the UK and Australia, is that we have many more options for debt relief and debt management. Not only does the US have more student loan debt and medical debt than pretty much any other country, but we also have better systems for dealing with it and helping consumers get back on their feet.
So, don’t bury your head in the sand. There is help available, lots of it, and by accepting this help, dealing with the issue, and finding a solution, you can avoid the indignity of a foreclosure and keep a roof over your head.