Foreclosure refers to a process that occurs when a homeowner is unable to make their monthly mortgage payments. They are consequently evicted from their home by the lender. Because of the contract signed by both the buyer of the home and the seller or lender, the lender has the authority to foreclose on the property. As stipulated in this contract, the house serves as a form of collateral.
Some lenders offer a grace period in which the payment can be made before the foreclosure process is initiated. Generally speaking, this period lasts only a couple of months before the property is foreclosed upon. And, because of late fees imposed by the lender, it is actually harder for the borrower to catch up.
Foreclosure by judicial sale is a specific type of legal action in which the mortgaged property is sold under court supervision. It is available in all states, and is the preferred foreclosure method in most jurisdictions. Utilizing this process allows all parties involved to be notified of the foreclosure proceedings. The debtor is generally allowed to participate in some parts of the proceedings, which are then followed by a judicial decision. The sale of the property may only proceed once the court decision has been finalized.
Foreclosure by power of sale proceeds without court supervision. Generally speaking, this is a much more efficient and quicker process. Although the court is not supervising the sale, all involved parties should still be notified. Although a majority of U.S. states allow for this method of foreclosure, foreclosure by power of sale is not available in every state.
Strict foreclosure refers to a specific type of foreclosure by judicial sale. During this proceeding, the court orders the mortgagor to repay their mortgage debt within a specified amount of time. If the mortgagor fails to do so, the mortgage holder is legally allowed to automatically gain title to the property. Additionally, the mortgage holder is under no obligation to sell the real estate in question. Strict foreclosure is only available to a small number of jurisdictions, specifically locations in New Hampshire and Vermont.
Simply put, foreclosure is the legal process that terminates the purchaser’s rights to the property that is bought under the mortgage agreement. Foreclosure sales can be managed by the courts, by the mortgage lender themselves, or through a third party.
What Is Pre-Foreclosure? What Is the Difference Between Pre-Foreclosure and Foreclosure?
Pre-foreclosure refers to a property status in which the property owner is informed that the property may soon be repossessed. The homeowner has missed multiple mortgage payments, and is ninety days late on their most recent payment. Generally, this happens as a result of the homeowner defaulting on their mortgage; as such, it is most commonly the bank or mortgage lending institution that is responsible for initiating the pre-foreclosure stage.
The pre-foreclosure process formally begins when the mortgage lender files a “Notice of Default” for the property. This notice informs the homeowner that legal action and foreclosure may follow, if their debt is not paid or otherwise addressed. In this stage, although the property is in the process of foreclosure it is still legally owned by the owner.
Foreclosure, on the other hand, means that the property lender or bank has taken the property away from the owner for not making payments. The house will go into foreclosure and be auctioned off by the lender or bank to the highest bidder.
What Are Some Differences Between Short Sales and Pre- Foreclosures?
Homeowners may be provided with a choice between pre-foreclosure and a short sale of the house. Short Sale refers to the process in which the lender agrees to take less than what is owed on a property as the payoff. Some defining characteristics of short sales include:
- The homeowner conducts the sale, and is in control of the property and the sale process until the sale is completed;
- Generally speaking, short sales result in a better overall credit score than foreclosure;
- The sale of the home is conducted through the public real estate market; and
- Short sales may not always be available under state laws, and can take a significant amount of time to process as short sale approval can often take between two and three months.
Some of the defining characteristics of pre-foreclosures include:
- The homeowner is still the legal owner of the house;
- The homeowner still has the option of selling the home during the pre-foreclosure stage;
- The homeowner is still able to avoid foreclosure in the pre-foreclosure stage; and
- The homeowner may still sell the home at market value if it is sold in the pre-foreclosure stage.
How Can I Avoid Foreclosure?
One of the central intentions of pre-foreclosure is to provide the homeowner with a chance to implement necessary changes, so that they may avoid foreclosure proceedings. Pre-foreclosure is sometimes considered to be a grace period in which the debts can be settled so that the owner can retain their title to the property. Some examples of steps that a homeowner may take to avoid foreclosure can include:
- Paying off debts and any back-payment amounts;
- Renegotiating payment terms for future payments with their lender;
- Obtaining an additional mortgage or outside loan, although this may cause more trouble later on;
- Selling their assets and using the profits to pay off their debts; and
- Enter into a short sale agreement, as previously discussed.
Banks and other lenders want their borrowers to avoid foreclosure just as much as they do. The borrower’s money and interest is much more valuable to them than their house. As such, if you communicate with your lender before the foreclosure process becomes inevitable, your lender will likely be willing to work with you to avoid foreclosure by offering any available alternative options to repay the loan.
In addition to the option of a short sale, the lender may offer a short refinance offer. This is a very forgiving plan offered by your lender, in which part of your debt is eliminated and the rest of the loan is refinanced. Another option would be a repayment plan, under which your lender will generally provide a time frame of a couple of months for you to repay the overdue amount. The intention here is to get you back on track with your payments, whereas short sales and short refinancing are intended to let you off the hook for repayment.
Other options include modification and asking for forbearance. Under modification, the lender and borrower attempt to reach a deal in which the lender modifies the term of the loan. In exchange, the borrower pays something, as opposed to nothing, as lenders would rather accept less than go through the foreclosure process. A temporary forbearance would stall the foreclosure process, giving the borrower more time to eventually pay off what they owe.
What Should I Do if Legal Disputes Arise During Pre-Foreclosure?
Legal disputes sometimes arise during the pre-foreclosure stage. An example of this would be how the pre-foreclosure process may uncover more debt than originally thought, such as tax debt. Additionally, pre-foreclosure can sometimes reveal defects with title and other similar issues, such as foreclosure fraud in which your property is wrongly foreclosed upon by a third-party.
These legal issues must be addressed before the property can be foreclosed upon or sold. This could require additional legal actions, which could change the outcome of the foreclosure process.
If you wish to fight the foreclosure, there are several steps you should take:
- File a written answer to the foreclosure complaint;
- Select a defense to the foreclosure that applies to your circumstances;
- Request that the lender produce the note or promissory note, as 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 that is being foreclosed;
- Negotiate a deed in lieu of foreclosure, and ask the lender if they are willing to accept the deed; and/or
- Declare bankruptcy.
Do I Need an Attorney for Help with Pre-Foreclosure Issues?
Pre-foreclosure generally does not require legal help or intervention from a lawyer. The most important thing is to check if you are able to stop the foreclosure process by paying off any balance that is due. If your lender says that you do not have a balance and you are not in pre-foreclosure, but you were sent a letter saying you were in pre-foreclosure, you should contact a local foreclosure lawyer immediately.
State laws regarding foreclosure vary widely, and as such, an experienced and local foreclosure attorney would be best suited to helping you understand your legal rights and options. An experienced attorney can also represent you in court, as needed.