Losing your home to a bank foreclosure is hard, but it happens.
If you’re facing foreclosure, knowing your options can help you feel more in control of the situation and its outcome. Read on to learn what to expect from foreclosure, and how you can prevent it.
What is a home foreclosure?
A home foreclosure is a legal process in which your lender takes your home following your failure to make your mortgage payments.
Making a payment fewer than 30 days late typically doesn’t trigger the foreclosure process. However, if you miss three or more payments, your lender will likely take action towards foreclosure to protect their interests.
Foreclosures are primarily governed by state laws, although there are some federal laws that relate to foreclosure. The foreclosure process in one state can be very different from the process in another state.
In addition to losing your home, having your home foreclosed on will also hurt your credit score.
How common are 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. And in 2018, the rate dropped even further, bottoming out at .47% — the lowest it’s been since 2005.
In 2009 and 2010, more than 2.8 million homes (2.2%) received some sort of foreclosure filing.
Are there different types of foreclosures?
Yes, there are judicial and nonjudicial foreclosures. Most states allow only one of these two types, though some states allow both.
In a judicial foreclosure, the state court is involved in the proceedings. It begins when a lender files a foreclosure lawsuit in court. Once the court has processed the lender’s complaint, the homeowner receives a court summons. At this point, the homeowner can either let the foreclosure happen or contest it in court.
If the homeowner opts not to contest the case, their home is sold in a court auction. Unsold foreclosed homes become bank-owned properties.
Judicial foreclosures take longer than nonjudicial foreclosures — typically months to years from the initial foreclosure notice to the court auction.
In a nonjudicial foreclosure, the court system is not involved — the lender has the authority to foreclose on the property on their own. State law mandates the details of when and why a lender might foreclose on a property.
After receiving a notice of default, the homeowner is usually given 120 days to make up their missed payments. If they can’t, the lender will send them a notice of intent to sell the property, as well as providing the specific sale date.
Nonjudicial foreclosures are typically much faster than judicial foreclosures. Without all the red tape of court proceedings, they can start and finish in a matter of months.
How the foreclosure process works
Keeping in mind that the process varies from state to state, here’s a rough overview of the foreclosure process:
- A homeowner fails to make mortgage payments over a period of several months.
- The lender sends the borrower a Notice of Default, informing them that the foreclosure process has begun.
- The borrower has a limited amount of time to respond to the lender and try to stop the foreclosure. The specific timeframe depends on state law.
- If the borrower doesn’t catch up on their mortgage payments or negotiate a mortgage modification, the lender publishes a Notice of Sale. A Notice of Sale is usually published three or four months after the Notice of Default is recorded, though the timing varies.
- The borrower has one more opportunity to catch up on payments and pay the lender’s costs and fees. The duration of this redemption period varies from state to state.
- The lender offers the home for sale at a foreclosure auction or sheriff’s sale. If the home is sold, then it belongs to the new owner. If it isn’t, then it 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.
How can you prevent a foreclosure?
If you’re late on your mortgage payments, or you’ve received a Notice of Default, don’t panic. There are still steps you can take to prevent a foreclosure.
Be proactive and communicative
Don’t ignore your situation! Sticking your head in the sand will only mire you deeper into debt. If you’re proactive and communicative with your lender, you’ll have a better shot at setting up a payment plan or refinancing your loan into a more affordable one.
If you’ve already missed a mortgage payment or think that you will soon, contact your lender and explain what’s happening and why. The sooner you open up lines of communication, the more understanding your lender will be. Getting them on your side could be the difference between setting up an affordable payment plan and losing your home.
Remember, foreclosures are costly for lenders, both in time and in money. Both you and your lender would rather avoid the headache. This means they may be willing to work with you to figure out a mutually beneficial solution.
Have you missed a few mortgage payments due to a temporary financial situation? If so, your lender might let you make up your missed payments over time while you continue to make your regular payments. However, you’ll have to demonstrate to your lender that you can afford a repayment plan.
If you have equity in your home, you may be able to refinance your mortgage into one with a lower rate or longer term to make your payments more affordable. If your loan is already in default, however, refinancing might not be an option for you.
Interested in refinancing? Consider the following options:
Are you unable to make your mortgage payments due to a temporary situation, such as a job loss, divorce, or illness? If so, your lender might allow you to skip a few payments or make partial payments. But when the forbearance ends, you’ll likely have to catch up on the payments you missed. If you don’t have the savings to do so, consider a low-interest home equity loan or home equity line of credit to cover this cost.
If you can’t afford your mortgage payment, ask your lender if they are willing to modify your loan to make it more affordable. A modification might involve a lower rate, a longer repayment term (allowing for shorter monthly payments), or partial debt forgiveness.
Can’t afford to keep your home, but don’t want to go through a foreclosure? If you simply give your home to your lender by handing over a deed-in-lieu, you can walk away with less damage to your credit.
Filing for bankruptcy protection can delay a foreclosure proceeding. However, bankruptcy is complicated, and it can damage your credit score for up to 10 years. If you’re desperate to keep your home and need to buy some time to come up with the money, bankruptcy is an option you might want to explore.
However, bankruptcy should never be your first choice. Before going this route, attempt to work out a payment plan with your lender, and consider other ways of getting the money. If you can’t qualify for a loan with decent terms and your lender is unwilling to negotiate, only then should you declare bankruptcy.
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%.
To qualify for the Flex Modification program:
- 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.
Leverage veteran protections
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.
Don’t get taken advantage of
While figuring out how to stave off foreclosure, watch out for mortgage modification scams. You may receive letters or phone calls from companies that promise quick fixes to your situation. If you receive such a solicitation, call your mortgage company and ask whether the offer is legitimate. Otherwise, you could lose a chunk of money that should have gone towards catching up on your debt.
Should you go through with a foreclosure?
If you simply can’t afford your mortgage payments and don’t foresee finding the money in the future, you may be tempted to let your lender foreclose on your property. Before you make a decision, consider 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.
- 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.
- 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 taxable income.
Losing your property is a scary prospect. But with the tools above, you can stave off foreclosure and hold onto your home.
Of course, the best way to avoid foreclosure is to avoid missing your payments in the first place. If you’re struggling to make your monthly payments, your best course of action is to refinance your mortgage loan into one you can better afford. Whether that means taking out a loan with lower interest rates, or simply extending your loan term to lower your monthly payments, refinancing can make your mortgage affordable.