If you are a homeowner facing foreclosure, you're probably angry, worried and even confused. You've likely been dealing with financial hardship for several months and may be feeling like you've reached the end of your rope. After all, real estate foreclosure is not something we choose to go through, and it's often difficult to know what to expect during this stressful process.
Here's a brief outline of how the process works and what a homeowner in default can expect.
A real estate foreclosure begins when a homeowner defaults on (becomes unable to pay) their mortgage. That will compel the lender, typically a bank, to initiate the foreclosure process. Exactly how many missed payments will trigger this action varies widely and is often done according to a lending institution's established policies. A common practice is for lenders to begin the foreclosure procedure about three to six months after the homeowner first misses a payment.
It's important to remember that lenders almost always use foreclosure as a last resort. They will usually work with a homeowner to find a solution that benefits both parties. That is because the foreclosure process is both expensive and time-consuming. It's always best for lenders to resolve non-payment in a manner other than foreclosure. If at all possible, homeowners who have defaulted should take advantage of any assistance their lender can offer to avoid having them foreclose on the home.
If a homeowner and a lender can not work out a solution, then the lender will initiate the foreclosure process. Depending on the state where the home is, there are two primary methods of foreclosure.
1. Judicial Foreclosure -- A judicial foreclosure, supervised by a state's court system, involves formal legal proceedings. Some states require this legal process. In judicial foreclosures, the court system oversees the sale of the mortgaged property at public auction. This type of foreclosure typically takes the longest to complete.
2. Non-Judicial Foreclosure -- Unlike judicial foreclosures, non-judicial foreclosures do not require oversight by the courts. In a non-judicial foreclosure, the lending institution oversees the auction at which the mortgaged property gets sold. Non-judicial foreclosures typically take less time to resolve that judicial foreclosures.
In each of these foreclosure methods, the lender sends the homeowner a notice declaring their intention to foreclose. That is usually the homeowner's opportunity to rectify the matter. Homeowners are strongly encouraged to act as soon as they receive such a notice. The sooner they take action, the more likely they are to avoid foreclosure.
Working With Lender
As mentioned above, homeowners are encouraged to contact their lender as soon as they receive a notice of foreclosure. By doing so, both parties can work together to find a resolution. This process can be time-consuming and somewhat stressful, but there are a few things homeowners can do to help it go as smoothly as possible.
Organize Your Financial Papers
Gathering financial documents together will give homeowners a chance to review their entire financial picture. This is an excellent way to prepare to speak intelligently with a lender. Some recommended documents are:
• Mortgage Statements -- These will show the amount of the monthly mortgage payment as well as the balance remaining of the original loan.
• Monthly Bills -- This will aid the lender in determining a total financial picture for the homeowner and can help pinpoint where changes can be made to free up some much-needed capital.
• Income Statements -- This may include weekly, bi-weekly, or monthly pay stubs as well as any other sources of income available to the homeowner. This information is crucial to help lenders determine the scope of a defaulted homeowner's financial situation.
Outline Your Current Financial Hardship
Gathering the information above will help homeowners to assess their current financial hardship honestly and intelligently. That will allow for clear communication with the lender, so they can determine how likely it is that a homeowner will be able to recover from their current situation.
With the relevant information, the homeowner and the lending institution can sit down and discuss opportunities for avoiding foreclosure. In many cases, this is a real possibility.
Some of the ways to avoid foreclosure are:
1. Interest-only Payments -- If the homeowner's current financial crisis is temporary, perhaps due to a short layoff or lengthy illness, the lender can opt for interest-only payments. Interest is a fee the homeowner pays the lender each month for lending them the money to buy their home. Interest-only payments suspend payback of the principal, the actual amount spent on the house, and this reduces the homeowner's monthly financial burden until they can get back on their feet.
2. Refinance -- Another possibility for lessening the homeowner's payment would be for the lender to refinance the original mortgage. If a homeowner has paid 15 years of a 30-year mortgage, refinancing the remaining 15 years back out to 30 years will significantly cut the amount of the monthly payment, making it easier to afford.
3. Lowering the Interest Rate -- Again, interest is a fee the homeowner pays the lender for lending them the money to buy their home. This fee is based on interest rates, which are always in flux. It may be possible for the lender to lower a homeowner's interest rate. That will have a substantial impact on what the homeowner must pay each month.
4. Seeking Family Assistance -- In some cases, if there is no other solution, it may be possible for the struggling homeowner to ask a family member to take over the loan. That makes the monthly payment the responsibility of the family member, who, presumably, can afford it. Once the lender is satisfied, it is up to the homeowner and their family member to work out a financial deal equitable to both.
Foreclosure and Public Auction
If for whatever reason, the lender and the homeowner cannot agree upon a solution, the lender will move forward with foreclosure. At the final stage, the foreclosed-upon home gets sold at public auction, which allows the lending institution to cut their losses and recover some portion of the amount the homeowner still owes but is unable to pay.
The auction announcement, placed in local newspapers and perhaps online, lets the public know it will take place and assures the lender a reasonable chance of selling the property. Many real estate investors look specifically for these auctions, hoping to purchase a suitable property at a bargain price.
The Final Step: Vacating the Home
There are two possible outcomes once a home goes to auction: it gets sold to the highest bidder, or it reverts to and becomes the property of the lender. This is often the case if the lender is unwilling to accept offers below a certain amount. They may choose to hold the property until the real estate market improves and they can cover the majority of their loss. In either of these scenarios, the foreclosed-upon homeowner will be expected to vacate the house. They will typically receive written notification of how long they have to move out.
It's clear that the real estate foreclosure process is not an easy one for either party involved. It can be stressful and confusing for the homeowner and can create additional financial and legal obligations for the lender. Hopefully, the stages of the process outlined in this guide have helped clarify what to expect during this challenging transition.