Table of Contents:
- Understanding Foreclosure – The Process
- Resources to Help Avoid Foreclosure
- Ideas For Finding Funds to Save Your House
- How a Lender Can Help
- “Can I Just Walk Away?”
Thousands of Americans’ Homes are in Foreclosure
If you’ve ever been involved in a foreclosure, or know someone who has faced the possibility of losing a home due to missing payments, it can be an emotionally taxing situation. It can also be difficult to navigate if not property educated. There are many questions that may seem difficult to answer, should you find yourself in this scenario.
Some examples of these questions can include:
- Do I have options to keep the property?
- Who can help me figure out what I can and can’t do?
- What if I want to leave this situation as cleanly as possible?
If facing foreclosure, it’s good to get a grasp for what this topic and what solutions may be available before making big decisions about your home. This article is designed to give you some knowledge, insight, and suggestions, should you find yourself having to make decisions revolving around foreclosure.
As there are many options available in the instance that foreclosure may be in the future, this article aims to provide a better understanding of the process. As you’d suspect, every foreclosure scenario is different. The rules vary from state-to-state (sometimes county-to-county) and are circumstantial. That said, after reading this article, our advice is to continue to do research on your own, consult your lender, chat with other professionals like lawyers and real estate agents in order to get a complete picture of what may be the best options for you in your unique situation.
If you would like to keep your home, this article will give you some creative ideas to do so.
On the flip side, if you’re ready to walk away, hopefully you’ll feel a little more enlightened by the end of the article.
How Does Foreclosure Work?
Foreclosure is simply the act of a home being possessed by a bank, due to the homeowner not being able to continue to make payments. There are a variety of reasons why homeowners fail to make their payments.
Foreclosure happens over time, and follows a series of steps before the process is officially complete. The proceedings in every state vary in terms of the process, as some states follow a judicial foreclosure process and some use a non-judicial system. The main difference between the two is states who use mortgages follow “judicial foreclosure”, whereas states who use deeds of trust are considered to use a “non-judicial” process.
Generically speaking, the process is similar in most foreclosure situations, and follows a formula as follows:
Step 1 – The Homeowner Misses Payments
There are a variety of reasons why homeowners may miss the monthly payments on their homes. The most common include:
- Being laid-off or fired from a job, resulting in loss of income
- Medical bills from a new or existing health matter
- Maintenance issues that can no longer be afforded
- Job relocation
- Various forms of debt
Contrary to popular belief, when mortgage payments are missed, foreclosure isn’t the only option. At times, homeowners are only temporarily unable to make their payments, but are able to catch back up. When this happens, banks will occasionally offer the homeowner the option to make a payment of one lump sum at an agreed upon date to help them make up for the months of missed payments. This is what’s known as reinstatement.
Additionally, banks may also spread the amount owed in missed payments over a handful of months to make it more financially feasible for the property owner in some cases, which is known as forbearance. Lenders usually prefer one of these options versus going straight to foreclosure, as they suffer a losses as well in the process.
Step 2 – The Lender Sends Notices
- In the official first step to foreclosure, the property owner will receive at least one letter in the mail from the lender. This letter will state that the property owner has failed to meet their obligation of making the payments they had agreed to, upon purchase of the property. The letter usually comes through the mail 3 months after the missed payment. It is also important to note that lenders would prefer to keep the homeowners in their home, as they usually suffer a financial loss too should the home go into foreclosure. That said, the letter is an official warning that the foreclosure process has started, and is sometimes the motivation for the property owner to get their affairs in order to find solutions to catching back up on their payments.
Step 3 – The Lender Starts the Foreclosure Filing
- If payments have not been made after 4-7 months, and steps have not been taken to get the property owner back up to speed with their payment schedule, the state where the property exists will determine the next steps in the filing process. As mentioned earlier in this article, each state operates either under judicial or non-judicial guidelines when it comes to the foreclosure process. In states where judicial guidelines are followed, the paperwork must go through a court system, which can create a longer timeline for the foreclosure process to occur. On the flip side, in states where non-judicial guidelines are followed, the process has a tendency to move quicker, as there are less hoops to jump through.
Step 4 – The Lender Will Foreclose and Sell the Home
- If payments continue to not be made, after usually 4-7 months, the lender will be forced to complete the foreclosure process, which means that they’ll take possession of the property. The property will then be priced it to sell, as the lender will want to sell it as soon as possible.
What kind of resources exist to help homeowners avoid foreclosure?
Sometimes there are solutions to avoiding a foreclosure that you may not have thought of yet. The following tips are simple ways to cut back spending, therefore freeing up some funds that may help you catch back up:
- Occasionally, lenders will help their clients (property owners) secure a loan that will help them make up for their missed payments. This loan allows the owners to stay in the home, get up to speed with their payments (using the new funds) and continue to keep the property.
Here are some examples of other ways to reallocate resources in order to catch up on missed payments:
- Cutting unnecessary spending. Examples: cable, cell phone, beauty, and dining out
- Re-evaluating your recurring payments: internet tv or subscriptions
- Taking out a loan against your life insurance
- Dipping into your 401k, as long the penalties do not outweigh the benefits
- Selling stocks or bonds
- Selling antiques, unused furniture, or other belongings with monetary value, but no longer have value to you
Did you know that your lender may be a source of assistance during a time that foreclosure may be on the horizon? Surprisingly, lenders are more flexible than one might originally think. As they are financially on the hook for the property too, they occasionally can assist with creative ways to help the owner keep their property.
Here is a list of options you may bring up to your lender as possible options to keep your property:
- Creating a plan to skip 1 to 3 payments, with a repayment loan in place
- Asking your lender if you could make partial payments for an allotted amount of time. For example, making interest-only payments, with a plan to pay the principal later.
- Coming up with a plan with the lender to allow you to spread out your missed payments over a series of subsequent payments.
- Asking lender to add your missed payments to the balance of your loan
Refinancing is also another options that may help the property owner catch up on their missed payments.
- Refinancing is the process of obtaining a new loan to replace the original. People will choose this option which will may lower the interest rate, thus lowering the monthly payments.
- If you are refinancing, there are particular types of loans that should be avoided. These include variable interest and prepayment penalty loans.
- If you refinance, avoid additional charges such as paying for different types of insurance that you weren’t paying for previously.
- Be truthful on your refinancing paperwork and applications, as you may get into legal trouble for
- If you are refinancing, do not lie on a loan application, because that lie is frequently a federal & state crime & can cause you to go to jail or be sued by your lender and cause a foreclosure if you overstate your income or otherwise tell a lie.
- Do not fall for scams such as paying for services that will offer counseling to eliminate your mortgage or prevent foreclosure.
Walking Away – Turn the Other Cheek
In some instances, folks who are facing foreclosure are looking for an option for a clean exit. This means they have come to terms with parting with their property, and are ready to take the necessary steps to finish the foreclosure process and move on with their lives. However, be careful not to give up and give away your home equity. Sell your property and keep the equity you’ve put into it, to give you a good foundation to start your next adventure.
Do keep in mind that the only real way to escape the foreclosure and keep the property is to catch up with missed payments and continue to make mortgage payments as regularly scheduled.
A rule of thumb while calculating expenses and determining the feasibility of keeping a property, if the mortgage payment is not higher than 45% of your household income (monthly gross), it could be possible for you to continue to afford to keep your property. If not, it usually makes sense to allow foreclosure or make the decision on your own to put your property on the market.
Did you know there are resources available to help you fix up and sell your home (without shelling out a dime)? Choosing an option like this will alleviate some of the stress, and help you earn more profit from the sale of your home.
- Statistically, homes that have been recently updated tend to turn a bigger profit than homes needing lots of fixes.
- An alternative to foreclosure is an improve-to-sell option. If your home could stand to be improved before being sold, there are a number of ways an improve-to-sell company can help you. The easiest way of thinking about a company like this is a “one stop shop”. This means they will:
- Provide a loan to you to make the necessary improvements
- Provide a team of contractors to complete the work needed to turn a bigger profit
- List and sell the home for you
To Sum Things Up
There are a number of simple steps to follow when facing the possibility of foreclosure:
- If mortgage payments are missed, it is better to do your best to catch back up sooner than later.
- Contact your mortgage lender as soon as possible, as they will have ideas and solutions for you that will hopefully provide some breathing room.
- Read your deed of trust or and promissory note to know how the lender may help if you default on your payments.
- If you are approached by foreclosure prevention companies to pay them for assistance, instead apply the funds to your loan.
- You may qualify for an interest rate reduction if you are a member of the military, which will in turn lower your mortgage payments.
- The average time it takes to sell a home is 3-8 months, so if you foresee yourself losing your property, be realistic and put it on the market if you know that’s your only option.
- Remember the only solution for getting out of a foreclosure situation is catching up on your loan payments. Do not be too prideful if you’re run out of possible solutions.