Foreclosure is a legal process which occurs when a homeowner cannot make their monthly mortgage payments. Because of this failure, the homeowner is evicted from their home by the lender. The lender is able to do so because of the contract signed by both the homeowner and the seller or lender. As stipulated in this contract, the house serves as a form of collateral.
Some lenders allow a sort of grace period. During this period, the payment can be made in full before a foreclosure occurs. However, this period generally lasts only a couple of months before the property is foreclosed. If a borrower is behind on their payments to the point that they are facing foreclosure, this “grace period” may be useless. Additionally, many lenders attach late fees which make it difficult for the borrower to catch up.
The exact foreclosure process varies from state to state; generally speaking, the process is very straightforward and lasts up to six months. How foreclosure proceeds will depend on whether the foreclosure is a judicial sale, or a nonjudicial sale.
Foreclosure by judicial sale refers to a foreclosure method in which the mortgaged property is sold under court supervision. This process allows all parties involved to be notified of the foreclosure proceedings. Under foreclosure by judicial sale, the debtor is usually allowed to participate in some of the proceedings, which are then followed by a judicial decision. A sale of the property may only proceed after the court decision is finalized. Because foreclosure by judicial sale is available in all states, it is the preferred foreclosure method in most jurisdictions.
Foreclosure by power of sale proceeds without court supervision. Doing so often results in a much more efficient and quicker process for foreclosing on the property. Although the court is not supervising the sale, all involved parties should still be notified. Although foreclosure by power of sale is not available in all states, a majority of U.S. states allow for this method.
Strict foreclosure is another, more specific type of foreclosure by judicial sale. In a strict foreclosure proceeding, the mortgagor is ordered by the court to repay their mortgage debt within a specified amount of time. If they are unable to repay the debt, the mortgage holder is allowed to automatically gain title to the property.
Further, the mortgage holder is under no obligation to sell the real estate. Strict foreclosure is available in a limited number of jurisdictions, specifically located in New Hampshire and Vermont.
What Does the Foreclosure Process Involve?
States maintain their own laws regarding the process of foreclosures. Generally speaking, there are several steps that must take place before the actual final step of when the lender seizes the property through the foreclosure.
In general, the process is as follows:
- Pre-Foreclosure: Once the property owner fails to make two to three mortgage payments (roughly thirty to sixty days), the property is considered to be in pre-foreclosure. In this stage, lenders will generally send a demand letter which demands full and immediate payment of the loan, plus any legal and late fees incurred. The homeowner has thirty days in which they may make the payments on the debt owed. If they do not, the foreclosure process will be initiated;
- Notice of Default: After ninety days of non-payment, the foreclosure process enters into the legal process. A bank will issue a notice of default to a local sheriff, and they will deliver it to the property owner. The notice of default is recorded by the government agency and a date will be selected for a foreclosure auction. A notice of default also provides a way for investors and other homeowners to conduct a short sale on the property;
- Foreclosure Auction: A public foreclosure auction will take place so that the property may be sold at the auction to the highest bidder. The lender issuing the default may also purchase the property to sell it independently in a private sale. At this stage of the foreclosure process, the homeowner must vacate the property or an unlawful detainer will be filed in order to evict the homeowner, if they are still living on the property after the sale; and
- Post-Foreclosure: If proceeds from the sale are insufficient to satisfy the debt owed, the lender may bring personal legal action on the borrower for the deficiency. In some states, the borrower may have a right to redeem after a foreclosure by paying the entire sale price.
How Can I Avoid Foreclosure? Can I Fight the Foreclosure?
It is important to note that banks and lenders want you to avoid the foreclosure process. Your money and interest is considered to be much more valuable to them than your physical house. If you are able to communicate with your lender before the foreclosure process becomes inevitable, they will most likely be willing to work with you to avoid foreclosure by offering alternative options to repay what you owe.
Some examples of common alternatives that may be available to you include:
- Short Refinance: This is considered to be a very forgiving plan. It is offered by your lender, and part of your debt is eliminated while the rest of the loan is refinanced;
- Short Sale: Under this plan, you are to sell your house for an amount lower than the loan amount still owed. The money goes to the lender, and the remainder of the loan is eliminated;
- Repayment Plan: Your lender would usually offer this option in circumstances involving some unforeseen expenses arising, setting you back financially. Lenders generally allow for a couple of months for you to repay the overdue amounts;
- Modify the Loan: Oftentimes, your lender will be willing to modify the terms of your loan. They would rather have you pay something, as opposed to nothing. As previously mentioned, lenders do not want to go through the foreclosure process either; and
- Request Forbearance: A temporary forbearance could stall the foreclosure process. This would give you more time to eventually pay off the amount that you owe.
Some practical tips to consider when trying to avoid a foreclosure include:
- Do not ignore the problem;
- Ensure you are receiving the notices from your lender and responding accordingly, as failing to do so will not serve as an excuse in the foreclosure court;
- Read and understand your rights provided in your loan documents, to ensure you know what the lender can and cannot legally do if you miss a payment;
- Ask for additional help from the U.S Department of Housing and Urban Development (“HUD”), as they have counselors that can assist in better managing your finances;
- Utilize your assets in order to reinstate your loans;
- Avoid foreclosure prevention companies, and do not pay fees for such assistance; and
- Be aware of foreclosure fraud and scams, namely ones that require a signature on one single document for your foreclosure to go away entirely.
During the foreclosure process, do not sign the title of the property to another person or company. Do not seek counseling from a non-HUD approved company or organization, and do not avoid court requests or court documents. Doing so would result in larger court fees.
If you wish to fight the foreclosure, there are several steps you should take:
- File a written answer to the Foreclosure Complaint, and select a defense to the foreclosure that is suitable to your circumstances;
- Request that the lender produce the note or promissory note, as if the note is not found, the foreclosure process cannot continue until the note is found;
- Consider selling the house before the house is sold or auctioned, and keep any equity that you have invested in the house;
- Question the chain of title on the home;
- Negotiate a deed in lieu of foreclosure, and ask the lender if they are willing to accept the deed; and/or
- Declare bankruptcy in order to stop the foreclosure.
Should I Consult a Lawyer About Avoiding Foreclosure?
If you are going through the foreclosure process, or are heading in that direction, you should consult with an area foreclosure lawyers immediately. Because state laws regarding foreclosure vary so widely, an experienced and local real estate attorney would be best suited to helping you understand your state’s laws and how those laws may impact your case.
An experienced attorney can also inform you of your legal rights and options, as well as represent you in court, as needed.