It can be a very worrying time when facing a potential foreclosure. Understanding the process can make it easier to deal with. Although there can be variations between states and lenders, most processes will have similar steps.
Below are the 6 stages of foreclosure that are common, and what you can do to help save your home and money.
1. Financial Hardship
Most foreclosures will start with a financial difficulty. This could include losing your job, paying for medical bills, going through a divorce, increasing living expenses or unexpected debt.
You are typically not considered to be in foreclosure if you are only missing one payment. Most mortgage companies will have a grace period, however you may receive a late charge and reminders. If the payment isn’t made then it will be considered delinquent.
After multiple payments are missed (usually 2), the lender may start to contact you to try to collect payments. This is a very important time to communicate with your lender. If you ignore these messages you may have fewer options, however if you contact your lender early you may qualify for help programmes.
Review your budget to see what you can do to help. Gather your income and expenditure details and contact your mortgage servicer to see what options you have to help you repay your loan. You may qualify for a loan modification which could change your interest rate, extend your term or add the missed payments onto the total. You could also qualify for a forbearance where you would have a reduced or paused payment. Or you may qualify for a repayment plan which would spread the overdue payments into your future payments.
2. Notice of Default
If you continue to miss payments then your lender may send you a notice of default. This is an official document letting you know that you are significantly behind on your payments and that the loan may enter into foreclosure.
These can vary between states so may not be referred to as a notice of default. Some states use a demand letter and others similar terms. They will usually show how much you are behind on and the deadline to pay.
Although receiving a notice of default doesn’t necessarily mean that you will lose your home. In many cases you will still have time to negotiate with your lender, apply for help, sell your home or look into other legal options.
Take care to check the document for any errors. If you see any mistakes with the balance, payments or your details then contact your mortgage servicer immediately. You may also want to speak with a HUD approved housing counsellor or a Foreclosure Solicitor.
3. Pre-Foreclosure / Loss Mitigation
The period after receiving the default notice and before entering into a foreclosure sale is often referred to as pre-foreclosure. This is often one of the best times to find help.
Depending on your financial situation and mortgage type, your lender may offer different options. You could qualify for a loan modification which could reduce your interest rate, extend your loan term or add the missed payments onto the loan balance. You could qualify for a forbearance where you would have reduced or paused payments. Or you could qualify for a repayment plan which would spread the overdue payments into your future payments.
If you are unable to stay in your home then you may be able to sell your home to avoid entering into foreclosure. If the value of your property is below the mortgage balance then your lender may agree to a short sale. In some cases you may be able to transfer ownership to the lender via a deed in lieu of foreclosure.
All options can have implications on your credit, tax, debt and future home ownership. Don’t sign any documents you are unsure of. Make sure to confirm all offers with your lender or a qualified professional.
4. Foreclosure Notice
If you are unable to come to an agreement with your lender then they may commence formal foreclosure proceedings. This will depend heavily on your state and whether they use judicial or non-judicial foreclosures.
A judicial foreclosure is when the lender will take you to court. You will receive legal documents and have an opportunity to respond. A court may then review the matter and give a judgment allowing the sale.
With a non-judicial foreclosure the lender typically won’t need to take you to court. A trustee or authorised party will follow a statutory process.
It is very important to be aware of any deadlines. If you fail to respond to any court documents you may be given a default judgment. Contact a Foreclosure Solicitor or Local Legal Aid to understand your options. Read through any documents carefully.
5. Foreclosure Sale
Once the legal requirements have been met your property may be put up for sale at a foreclosure sale. The lender or trustee will usually publish or send a notice detailing the date, time and location of the sale. They will also include details of how the sale will work.
Your home will then be sold to the highest bidder. This will often start from a minimum bid based on the loan balance and costs of the foreclosure. If there is no external buyer offering enough then the lender may take ownership. These properties are commonly referred to as REO properties.
You may have rights to cure or redeem your property. These can vary greatly between states. Some areas allow you to pay the required payment to stop the foreclosure, others will have a shorter time frame.
As the rules are very specific don’t assume that you have no options. You may still benefit from immediate professional help.
6. Eviction
After the sale of your property you may have to leave. The lender or new owner will usually send you a notice to vacate. If you fail to leave within the given time frame then the new owner may commence formal eviction proceedings.
Don’t assume that any buyer or lender will be able to evict you straight away. The rules can vary between areas.
A foreclosure can impact your credit report, borrowing in the future, rental applications and in some cases employment. This can last for many years however it will generally reduce over time as you build up good credit.
After you have moved out create a realistic plan to get your finances back on track. Check your credit reports are correct, make sure you pay all of your remaining accounts on time and don’t fall for any high cost credit repair promises. If you have any issues with a deficiency or tax then seek advice. In some cases bankruptcy may be appropriate however it is a big decision and should be looked into with a qualified legal professional.
How to Deal With a Notice of Foreclosure
The most important thing is to act quickly. Open all letters, keep copies of any correspondence and write down any calls you make to your mortgage servicer. Try to ask for the information in writing.
Look into free or low cost help from a HUD approved housing counsellor, Legal Aid office, Non Profit organisation or State Housing Agency. Be wary of any company asking for large fees upfront or promising they can stop the foreclosure.
Whilst knowing the 6 stages of foreclosure won’t take away the stress of financial difficulties it will help you understand the deadlines and make informed decisions. If you communicate with your lender early, have the correct information and seek professional help you may have options available that you won’t have later.
