A Complete Guide To Home Mortgage Foreclosure

Find out what to do if you're struggling to pay your mortgage. If you're wondering whether foreclosure is a good option for you, read on.

There’s no doubt about it: losing your home to a bank foreclosure is hard, but sometimes it happens.

If you’re facing foreclosure, knowing your options can help you feel more in control of the situation and outcome. Knowledge can also set you up to buy a home again in the future.

What is a home foreclosure?

A home foreclosure is a legal process in which your lender takes your home if you don’t make your mortgage payments.

Making a payment fewer than 30 days late typically doesn’t trigger the foreclosure process. Missing three or more payments altogether will likely result in your lender taking action.

Foreclosures are governed mainly by state law, although some federal laws relate to foreclosure as well. The foreclosure process in one state can be very different from the process in another state.

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How many foreclosures in the U.S.?

At just 0.51%, the U.S. foreclosure rate in 2017 was quite low. Only 676,535 homes received a foreclosure filing in 2017.

The rate was slightly higher than it was in 2005, but substantially lower than the rates at the peak of the Great Recession.

In 2009 and 2010, more than 2.8 million homes, or 2.2% of the total, received some sort of foreclosure filing.

Types of foreclosures: judicial and nonjudicial

Most states use one of two types of foreclosure proceedings: judicial or nonjudicial. Some states allow both types of proceedings.

The primary difference between judicial and nonjudicial foreclosures is apparent in the name. “Judicial” refers to judges and the court system.

A judicial foreclosure means the state court is involved in the proceedings and a nonjudicial foreclosure means the court system is not involved.

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A foreclosure can happen within a few weeks or take many months, depending on the state’s laws, the type of foreclosure proceeding and how quickly the lender acts.

Generally, it takes at least 120 days for the process to get started. At the height of the Great Recession, some foreclosures took more than a year before the homeowners lost their home and had to move out.

How the foreclosure process works

Keeping in mind the state differences, here’s a step-by-step overview of how the foreclosure process works:

  1. A homeowner fails to make multiple mortgage payments over a period of several months.
  2. The lender records a Notice of Default. This notice informs the borrower that the loan is in default and the foreclosure process has started.
  3. The borrower is given a time period to respond to the lender to try to stop the foreclosure. The timeframe depends on state law.
  4. If the borrower doesn’t catch up on the mortgage payments or negotiate a mortgage modification with the lender, the lender publishes a Notice of Sale. The timing varies, a Notice of Sale usually is published three or four months after the Notice of Default is recorded.
  5. The borrower is given another opportunity to catch up on the payments and pay the lender’s costs and fees. The duration of this redemption period varies from state to state.
  6. The lender offers the home for sale at a foreclosure auction or sheriff’s sale. If the home is sold, it then belongs to the new owner. If it isn’t sold, it then belongs to the lender.

Foreclosed properties owned by a lender are referred to as Real Estate Owned or (REO).

Lenders typically sell REOs to new owners through a real estate broker.

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Foreclosure prevention options

Refinancing 

If you have equity in your home, you may be able to refinance your mortgage with a lower rate or longer term to make your payment more affordable. If your loan is already in default, refinancing might not be an option for you.

Repayment plan

If you’ve missed a few mortgage payments due to a temporary financial situation, your lender might let you make up your missed payments over time while you continue to make your regular payment. You’ll have to demonstrate to your lender that you can afford a repayment plan.

Forbearance

If you’re unable to make your mortgage payments due to a temporary situation, such as a job loss, divorce, or illness, your lender might allow you to skip a few payments or make partial payments. You may have to catch up the missed payments when the forbearance ends.

Loan modification

If you can’t afford your mortgage payment, your lender might modify your loan to make it more affordable for you. A modification might involve a lower rate, longer repayment term, or partial debt forgiveness.

Deed-in-lieu

If you can’t afford to keep your home, but you don’t want to go through a foreclosure, you can give your home to your lender and walk away with slightly less damage to your credit.

Bankruptcy

Filing for bankruptcy protection can delay a foreclosure proceeding; however, bankruptcy is complicated and could affect your credit score for up to 10 years. If you want to keep your home, but you can’t make your payment or work out an arrangement with your lender, you might want to explore this option.

Which of these options are open to you depends in part on your lender’s policies and practices, and what type of loan you have.

Flex modification for Fannie, Freddie loan

If your loan is owned or backed by Fannie Mae or Freddie Mac, you may be eligible for the Flex Modification program. This program might get you a rate adjustment, extended repayment term, or forbearance to lower your payment up to 20%.

Some of the requirements are:

  • Your loan must be at least 60 days delinquent or determined by your lender to be in danger of imminent default.
  • You must be able to document that you’ve suffered a severe financial hardship.
  • You must have enough income to make a modified payment.

The Flex Modification program replaced the Home Affordable Modification Program (HAMP), which ended Dec. 31, 2016, and the Home Affordable Refinance Program (HARP), which closes in December 2018.

Federal law gives active-duty military personnel special protections in home foreclosures. If you’re on active duty or recently completed active duty, notify your lender, and ask whether these protections apply to your situation.

Facing foreclosure: first things to do

If you’re struggling to make your mortgage payment, the first things you should do are:

  • Don’t ignore your situation. Waiting to get help will only make it harder for your lender to work with you to find a solution.
  • Contact a housing counselor. A counselor can help you before, during, and after a foreclosure. Getting help sooner might give you more options to keep your home.
  • Pay attention to communications from your lender. Ignoring your mail and phone won’t stop the foreclosure process. Read the information you receive and be open to discussing your options.
  • Review your spending. If you want to keep your home, reprioritize your spending to pay your mortgage first and catch up on any payments you missed as quickly as you can.
  • Watch out for mortgage modification scams. You may receive letters or phone calls from companies that promise quick fixes. If you receive such a solicitation, call your mortgage company and ask whether the offer is legitimate. Your mortgage servicer’s phone number should be on your monthly mortgage statement.
  • If you’ve already missed a mortgage payment or think you will miss one or more payments in the near future, contact your lender and explain what’s happening and why.
  • Foreclosures are costly for lenders. Yours may be willing to work with you to figure out a way for you to catch up on your mortgage payments.
WEIGH THE RISKS AND BENEFITS

Consider the pros and cons of foreclosure before you make a decision. Here is a list of the benefits and the drawbacks of foreclosure.

Pros
  • You can get out of an underwater mortgage or payments you can't afford.
  • Fast resolution.
  • Typically, it's not as devastating to your credit as filing for bankruptcy.
  • In some states, lenders can't demand the balance between the market value and the amount owed.
Cons
  • It will hurt your credit.
  • Will probably hurt your chances of getting a mortgage in the future.
  • The "forgiven mortgage loan balance" in a foreclosure is considered as a source of income and, therefore, taxable.

Foreclosure alternatives - getting advice

Alternatives to foreclosure can be very complicated, and it can be challenging for homeowners to understand all the implications of their various options.

Counselors trained and certified by the U.S. Department of Housing and Urban Development (HUD), a federal government agency, are HUD-approved and can help.

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A housing counselor can help you:

  • Understand your financial situation.
  • Develop a budget.
  • Figure out how much you can afford for your mortgage payment.
  • Explain to your lender why you can't make your payment.
  • Understand your options to avoid foreclosure.
  • Choose a foreclosure prevention option that makes sense for you.

If you're considering bankruptcy, you should contact a bankruptcy attorney for advice.

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What to do if you're at risk of foreclosure

If you're struggling to make your mortgage payment, the first things you should do are:

  • Don't ignore your situation.
  • Contact a housing counselor.
  • Pay attention to communications from your lender.
  • Review your spending.
  • Watch out for mortgage modification scams.
  • Contact your lender and explain what's happening and why.
  • Find out if your lender is willing to work with you.
  • Consider a mortgage refinance.

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