In light of the recent global pandemic, the foreclosure rate has increased in United States real estate. It can be challenging to prevent a foreclosure once the process has started, and it only gets more difficult as the process progresses.
If you are currently having problems making your mortgage payments, you should immediately take steps to prevent a foreclosure, like getting on a repayment plan. The sooner you address the issues, the more loss mitigation options you will have.
A foreclosure sale is a legal process where a loan lender takes ownership of a property and auctions it off to try and recoup the investment they placed in the property. To accept a mortgage request, just about every loan lender requires that the property be offered as collateral. That means that if the borrower defaults, the lender will have a legal right to seize the collateral and take ownership.
In most cases, the property will then be auctioned off to the highest bidder, and the lender will receive the sale proceeds. If the sale price is less than what remains on the mortgage, the lender might sue the borrower for the remaining balance.
The most common reason that someone might experience a foreclosure is by missing multiple mortgage payments. There are a few reasons why this might happen suddenly, such as losing your job, divorcing your spouse, undergoing expensive medical procedures, or an unexpected life event.
The global COVID-19 pandemic directly contributed to people experiencing several of these issues all at once. As a result, the government stepped in and created a moratorium on foreclosures to help keep people in their homes. When the moratorium was lifted, foreclosure rates in the U.S. skyrocketed by 67% over the previous year.
These financial hardships aren’t the only reasons someone defaults on their mortgage. Another common cause of foreclosure is adjustable-rate mortgages. The majority of mortgages are fixed-rate, which means that the interest rate will remain the same throughout the loan term. An adjustable-rate mortgage means the interest rates will fluctuate with the active market. Since interest rates have been climbing from all time lows, homeowners with adjustable rates are finding it exceedingly difficult to keep up with the drastic changes in their once low monthly payments. If interest rates are too high, it might become difficult to maintain monthly payments.
The housing market is another factor that can result in foreclosure. A homeowner might try to sell their house if they cannot continue making their payments. If the housing market is weaker than normal, it could be challenging to sell the home for enough money to pay off the mortgage.
Every state has different rules and regulations for foreclosures. The laws and details might vary depending on where you live, but they will typically fall into one of three categories.
The most common type of foreclosure is judicial foreclosure. State laws allow this type of foreclosure, and a few specifically require it. After a borrower defaults on their mortgage, the lender will file a lawsuit with the local judicial system. The borrower will receive an official notice in the mail demanding a payment to be made.
The borrower will be given a 30 day redemption period to respond with payment to avoid foreclosure. If no payments are made within the set period, the lender will sell the property to the highest bidder at auction. The local court or sheriff’s department will carry out the sale, and the proceeds will go to the lender.
These foreclosures will require specific language written into the original mortgage agreement. The “power of sale” clause will provide the lender with privileges not permitted under conventional mortgage terms. Instead of involving the courts, the lender typically carries out statutory foreclosures.
After a borrower defaults on the mortgage, the lender will send out notices demanding payments and provide a period before foreclosure. If no payments are made within the established time frame, the mortgage lender will carry out a public auction of the property. These auctions don’t involve the local courts or sheriff’s department, so they will typically happen much faster.
Only a few states permit this type of foreclosure, so they are pretty rare. Strict foreclosure proceedings will unfold similarly to judicial foreclosures. After a borrower has defaulted on their mortgage, the lender will get legal advice, file a lawsuit, and take the complaint to the local courts.
The court will mail official notices to the borrower and grant them an established period to make payments on the mortgage. The court will return the property to the lender if the borrower does not make any payments on the mortgage. Instead of an auction, the lender will be granted legal ownership of the property.
These types of foreclosures are commonly used when the amount of debt is more than the property's overall value. Rather than losing money with an auction, the lender can hold the property or attempt to sell it privately for a higher price.
The exact details of foreclosure will look a little different depending on the specific laws of the state and the type of foreclosure being pursued. However, a few stages will transpire similarly regardless of these factors.
There are essentially five distinct stages of foreclosure, and they’ll happen in the following order:
A mortgage is considered in default once a borrower has missed a monthly payment. Most lenders will assign a due date for mortgage payments for the first month and offer a grace period of around 10 to 15 days. There will normally be late fees for the mortgage, but making the payment will restore the loan to a current status. The lender will usually try to contact the borrower and notify them that they didn’t receive the latest mortgage payment.
After a second missed payment, the lender will send out a demand letter with a much more serious tone than the previous notice. Despite the severity of the letter, lenders will still be very eager to help the borrower resume payments. Proceeding with a foreclosure can be a lengthy and expensive process for a lender, so they would prefer to avoid the process if possible.
The lender will issue a public notice of default after the fourth missed payment which is normally when the mortgage is 90 days past due. Once the notice has been issued, the borrower will have 30 days to make payments on their past-due mortgage or continue the foreclosure proceedings.
Federal laws prohibit a lender from escalating a foreclosure unless the borrower is 120 days past due on their mortgage payment. A borrower will have this final opportunity to bring their mortgage out of default, or the foreclosure will be virtually unstoppable.
The next step varies among the different types of foreclosure. Non-judicial foreclosures (statutory or strict) only require paperwork to be filed with the court to reach the next step. Judicial foreclosures require the court's approval for each of the following stages of foreclosure.
After the court approves the filed forms and allows the foreclosure to continue, the attorney for the lender will set a date for the sale of the property. The notice of trustee’s sale (sometimes called a notice of sale) will then be recorded in the county's public record where the property is located.
The notice will include the specific time and location of the sale and include a minimum starting bid for the upcoming auction. Lenders will also be required to publicly advertise the property auction in the weeks preceding the auction. They will typically have to spend some money to take out advertising space in newspapers, flyers, billboards, or online.
The amount of time between the notice of sale being approved and the auction date will vary depending on the state. In some states, this process can take roughly two to three months. In this time period, the homeowner can redeem the property by obtaining a payment arrangement. The total payment amount will typically include various late fees and any court costs or attorney fees incurred by the lender up to this point.
The property will be placed for public auction during this stage, and the deed will be transferred to the highest bidder as long as they meet predetermined qualifications. Either the mortgage lender or the law firm representing the lender will create the minimum opening bid for the auction.
To calculate the opening bid, they will need to consider the remaining total of the loan and any existing liens placed on the property. They will typically factor in unpaid taxes or any costs that will come with selling the property. The auction will conclude when no parties are interested in making a higher bid for the property. The winner will be required to either pay the entire amount in cash or make a significant deposit and make arrangements to pay the rest soon.
In some states, the deed transfer is placed on pause as the previous homeowner is granted a “right of redemption” and has the chance to buy back the home after the auction. The homeowner pays the sale price or the remainder of the loan, plus any interest or costs accrued during the process. The timeline for a homeowner’s right of redemption can vary. Some states only allow the chance to repurchase the home until the clerk files the sale certificate, while others provide an entire year after the sale is completed.
If the property is not sold during the public auction, the lender will assume ownership. Normally the lender will attempt to sell the property privately using a broker or asset manager. They might have to remove some of the liens on the property or upgrade it to make the sale more attractive to potential buyers.
After the auction has concluded and a new owner is established, the borrower must vacate the property, and anyone still living there will be court-ordered to leave. The local court will create an eviction notice that will demand any persons currently living on the property to vacate immediately or face criminal charges of trespassing.
The court will normally grant a few days and allow the occupants to exit and remove any personal belongings. Suppose they remain after the period has expired. In that case, the local sheriff’s department will enforce the ruling by removing the individuals and impounding any of their belongings located on the property.
Falling behind on just one mortgage payment will trigger the foreclosure process, so it’s best to stay on top of payments. That is easier said than done with the current instability involving the economy and housing market. If you find yourself struggling to continue making payments on your mortgage, you should act immediately and try to avoid foreclosure at all costs.
The further into the foreclosure process you get, the more difficult and more expensive it will be to get out. A few available options can help prevent your home from being foreclosed.
Entering into a co-investment with Balance Homes can be an easy way to avoid foreclosure, lower your monthly occupancy payments, and stay in your home. Balance Homes will pay off the remaining total of your mortgage and co-invest in your home. That will help you keep your share of home equity and stay in your home instead of losing your home in a foreclosure and eviction.
Each month you would be required to make occupancy payments to Balance to cover the operating expenses such as taxes, insurance, and HOA fees. Balance will also pay a share of these operating expenses as a co-investor.
Balance also provides resources to help homeowners long term financial success. Balance co-owners have ongoing access to a portion of their home equity to avoid setbacks while their credit recovers. Meaning you can submit a request to access additional cash if necessary to avoid missing payments or taking on high interest debt.
By maintaining your home equity and taking these proactive steps, Balance believes we can help you rebuild your credit and financial health — and create your path back to traditional homeownership.
Refinancing your mortgage can be a helpful way to lower your payments if you have better credit now than when you originally took out the mortgage. You will be taking out a new mortgage that only pays off your current mortgage with a more favorable interest rate and terms.
You might need to add a few years onto this new mortgage to get the monthly payments more manageable, but you won’t default on your loan and have the property foreclosed. For homeowners that have already fallen behind on mortgage and other payments, this option may not be available due to credit score requirements needed to qualify.
If you cannot find a lender to refinance your mortgage, you might need to sell the property and try to get out of the mortgage as cheaply as possible. A short sale gets its name because the property's sale price is usually “short” of the total balance remaining on the mortgage.
The mortgage lender would need to approve the sale and take all of the proceeds from the sale. The lender may require you to cover the difference between the sale and mortgage and cover the costs of the sale.
A deed in lieu of foreclosure is an agreement between a mortgage lender and homeowner that essentially speeds up the foreclosure process. Instead of involving the courts and attorneys, you would voluntarily sign the property’s deed over to your mortgage lender. In return, the lender will release you from your mortgage obligation.
A deed instead of a foreclosure agreement is generally beneficial to both parties, but mortgage lenders have the right to refuse them. If they stand to gain more by continuing with the foreclosure, they might turn down the offer and sell the property at public auction instead.
It’s important to note that a deed in lieu of foreclosure will be reflected on your credit report for a period of four years, and it will make it more difficult to get a mortgage during this time. However, that’s much better than a foreclosure as it will impact your credit for seven years, and it normally is an automatic disqualifier for potential mortgages.
Defaulting on your first mortgage payment will trigger the foreclosure process. The further that you go into the foreclosure process, the more difficult it will be to prevent it from progressing further. If you've already missed a payment or don’t believe you’ll be able to continue making payments, you should immediately take action and avoid the foreclosure process if possible.
Refinancing your mortgage, short selling your home, or proposing a deed in lieu of foreclosure are a few options that can help you avoid foreclosure. Before looking into them, you should look into a co-investment opportunity with Balance Homes. Get a free proposal from Balance Homes today and find out how much you can lower your monthly occupancy payments.
Sources:
Foreclosures surge 67% as Covid mortgage bailouts expire | CNBC
Stages of the Foreclosure Process | The Balance
Foreclosure Process/US Department of Housing and Urban Development | HUD.gov
Foreclosure Basics: How It Works And What To Do To Keep Your House | Forbes
