Foreclosure is a scary word. According to Investopedia, a foreclosure is a legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it.
Basically, if you’re no longer able to pay your monthly mortgage payments, the bank will seize your property and sell it with hopes of recovering the money that you still owe on the property. The actual foreclosure is the very last step in a long process or pre-foreclosure. The pre-foreclosure process can last from around 175 days or over 3000, depending on what state you live in. The average number of days in the second quarter of 2021 was 922 days.
What is Pre-Foreclosure?
The good news is that up until the actual foreclosure, when the lender actually seizes the property, you can find an alternative solution with your bank. Typically speaking, foreclosure isn’t the best option for the borrower or the lender, so banks will often work with you to find a solution.
Typically your lender will allow one or two missing payments before they start to take action. Usually, around the third month of skipped payments, the lender will initiate the first step in the foreclosure process, the demand letter. If you receive a demand letter, you will have 30 days to pay all missed payments plus any incurred fees in order to get back in good standing with the bank. If you don’t think you can catch up with payments at this point, it’s a good idea to start looking into other options.
What Are Your Options?
Your first step should always be to talk with your lender and see if they can help you with your situation. The earlier in the process that you do this, the better. The bank may allow you to refinance or modify your loan. With loan modification, you will extend the loan over more years, lowering your monthly payment.
Another option is to ask for a special forbearance. This is the best game plan if you feel like your financial issues are only temporary, and that you can get back on track in a few months. The banks may agree to avoid foreclosure for an agreed amount of time to allow the borrower some time to get caught up. This is not loan forgiveness, you will still owe the same amount. Typically the skipped payments will be tacked onto the back end of your loan.
If you don’t think that extra time with allow you to make your mortgage payments again, you can consider selling your home before the foreclosure and using the proceeds to pay back the money you owe to the bank. It’s important here to do some research and figure out what your home may sell for to make sure you will make enough to pay off the bank. It’s a good idea to work with an experienced realtor to sell your home for as much as possible but make sure to factor in all fees relating to selling your home.
If your home is worth less money than you owe to the bank, they might be willing to consider a short sale. In a short sale, the bank may agree to forgive the difference owed on the loan or require you to pay the difference. Short sales require approval from your lender and can be a very lengthy and frustrating process.
How Do Foreclosures Work?
If you’ve done everything you can to avoid foreclosure but unfortunately had no luck, your lender will likely move forward with the final foreclosure. After the notice of default is delivered, the borrower has their final 30 days to reinstate the loan. The entire process varies from state to state. There are two main foreclosure processes – judicial and nonjudicial.
In judicial foreclosure states, the lender must prove to the courts that the borrower has defaulted. Then the local sheriff will auction off the home if the foreclosure is approved by the courts.
In non-judicial states, the lender does not have to go through the courts. They have power of sale, meaning they can skip the courts and go straight to auction.
What Are The Consequences of a Foreclosure?
Other than the obvious fact that you will be evicted and lose your home, a foreclosure can have other long-lasting, negative effects on you and your finances. If the sale of your home still doesn’t cover the remaining balance on your loan, you may be required to pay the deficiency to the bank. This could happen from a short sale or sale at auction.
Foreclosures also do some serious damage to your credit score. Your score will be impacted as soon as you miss one single payment. Not only that, but it will stay on your credit report for seven years. This can have other negative effects on your life, like making it more difficult to rent an apartment or buy a car. Having a foreclosure on your record will also diminish your chances of getting a loan in the future. In most circumstances, you’ll need to wait between five and seven years to get another loan.
You might even end up with taxes you never saw coming. If the bank forgives any portion of your loan, that amount becomes taxable as income. Come tax season, you may be required to pay income tax on any piece of your loan that was forgiven.
