is a process that allows a lender to recover the amount owed on a
defaulted loan by selling or taking ownership (repossession) of the
property securing the loan. The foreclosure process begins when a
borrower/owner defaults on loan payments (usually mortgage payments) and
the lender files a public default notice, called a Notice of Default or
The foreclosure process can end one of four ways:
borrower/owner reinstates the loan by paying off the default amount
during a grace period determined by state law. This grace period is also
known as pre-foreclosure.
borrower/owner sells the property to a third party during the
pre-foreclosure period. The sale allows the borrower/owner to pay off
the loan and avoid having a foreclosure on his or her credit history.
3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
lender takes ownership of the property, usually with the intent to
re-sell it on the open market. The lender can take ownership either
through an agreement with the borrower/owner during pre-foreclosure, via
a short sale, foreclosure or
by buying back the property at the public auction. Properties
repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).
Pre-Foreclosure (NOD, LIS):
a property in pre-foreclosure involves approaching the borrower/owner
and offering to buy the property outright. The borrower/owner can walk
away with something to show for any equity in the property and avoid a
bad mark on his or her credit history. The buyer has time to research
the title and condition of the property and can realize discounts of
20-40 percent below market value.
Wondering what happens after foreclosure?
Then please read on. Remember that understanding foreclosures is the first step for homeowners to stop foreclosure.
It is also the first step for investors to buy foreclosure properties.
Auction (NTS, NFS):
the loan is not reinstated by the end of the pre-foreclosure period,
potential buyers can bid on the property at a public auction. Buyers
often are required to pay in cash at the auction and may not have much
time to research the title and condition of the property beforehand;
however, a public auction often offers some of the best bargains and
avoids the unpredictability of dealing directly with the borrower/owner.
If the lender
takes ownership of the property, either through an agreement with the
owner during pre-foreclosure or at the public auction, the lender will
usually want to re-sell the property to recover the unpaid loan amount.
The lender will then typically clear the title and perform needed
maintenance and repair; however, the potential bargain for these REO
homes is typically less than a pre-foreclosure or
auction property. Bank foreclosures can become government
foreclosures if the loan is backed by a government agency such as the
Department of Housing and Urban Development (HUD) or the Department of
Veterans Affairs (VA). In that case the government agency would be
responsible for selling the property.
How to Stop Foreclosures
Home owners who are facing foreclosure often dread dealing with the facts that got them to that place.
If they think back to when they first bought that home, losing the home was probably the furthest thing from their mind.
Few home owners actually plan to go into foreclosure.
Reasons For Pending Foreclosure
from those who knowingly participate in mortgage fraud -- with the
intention of never making a single payment -- most homeowners face
sudden extenuating circumstances that force them to stop making timely
mortgage payments. Here are a few of those reasons:
- Job loss / unexpected unemployment
- Sudden illness or medical emergency
- Death in the family
- Divorce / loss of second income
- Excessive debt obligations
- Job demotion or promotion denials
- Inability to pay an adjustable interest rate that increases
- Unexpected major home maintenance expense
Ways to Avoid Foreclosure
best way to avoid foreclosure is to prevent the filing of a Notice of
Default. Lenders do not want to foreclose but will file a Notice of
Default to protect their interests, if necessary. If you know you are
unlikely to meet your mortgage obligation, the first thing you should do
is call your lender.
put it off, be embarrassed or ignore letters from your lender because
those responses will make the situation worse, not better. Depending on
your particular situation and hardship circumstances,
Here are some options your lender might propose to you:
Time to make up your payments
might agree to wait before taking legal action against you and let you
work out a repayment plan that is affordable for you. This is called
Forgiving a payment
you can agree on a way that you will be current after missing a payment
or two (without the means to pay it back), the lender might give you a
break and waive your obligation. This is called debt forgiveness, and it
Spread out the missed payments over a longer term
For example, if your payment is, say, $1,200 a month, the lender might let you add $100 a month to each payment for a year until you are caught up. This is called a repayment plan.
Changing the terms of your loan
your mortgage is an adjustable loan, the lender might freeze the
interest rate before it increases or change the interest rate to a more
manageable rate for you. A lender might also extend
the amortization period. This is called a note modification.
Add the back payments to your loan balance
you have sufficient equity and meet the lender's lending guidelines, the
lender might increase your loan balance to include the back payments
and re-amortize the loan. This is called a refinance.
Make a separate loan to you
government loans contain provisions that let borrowers who meet
specific criteria apply for another loan, which will pay back the missed
payments. This is called apartial claim.
Ways to Stop Foreclosure
the lender files a Notice of Default, your options are limited. That is
why it is better for you to call your lender before falling behind on
your payments, because lenders are often reluctant to work out repayment
schedules after foreclosure proceedings have been commenced.
will be given a certain time period to bring the payments current, pay
the costs of filing the foreclosure and stop the foreclosure. This is
called reinstatement of your loan. If you cannot make up the missed
payments and the lender will not work with you, here are a few other
options to stop foreclosure:
Sell Your Home
I am happy to give you my opinion of market value and
average DOM (days on market) to sell your home. You might be tempted to
hire a discount broker, but many sellers feel they need the exposure
and marketing that full-service brokers offer. Compare both to determine which best meets your needs and time frame.
Consider a Short Sale
If your home
is worth less than the amount you owe, you might be a candidate for
ashort sale. A short sale affects credit but it's not as bad as a
foreclosure. You or your agent will need to negotiate with your lender
to find out if the lender will cooperate on a short sale. This is called
a pre-foreclosure redeemed.
Sign a Deed-in-Lieu of Foreclosure
called deeding the home back to the lender. The homeowner give the
lender a properly prepared and notarized deed, and the lender forgives
the mortgage, effectively canceling the foreclosure action. Lenders tell
me that deeds-in-lieu of foreclosure affect credit the same as a
lender might also work an arrangement where a home owner can remain in
the home until finding a place to move into. Owners in default should
negotiate the right to retain occupancy, arguing that if the lender
followed through on the foreclosure, an owner would still enjoy the
right of possession during that procedure.