Facing a foreclosure? Learn more about this process

It is not a secret that the economy is in the grip of a depression. Based on the news headlines, the millions of Americans are falling behind on their mortgages taken out in economically kinder times. What can happen if you default on payments? You have probably heard the term foreclosure. In this article, we will look at the foreclosure process and its effects. 

Rising food and utilities prices, job cuts and slumping home values make borrowing increasingly difficult. If you got laid off from your job or had a life-changed accident that strained your finances, you may find that you can't afford to make your monthly loan payments.  

Some years ago people took home equity loans to get through troubled times. However, due to the subprime mortgage crisis and falling home values, nowadays the majority of financial institutions have limited customer access to HELOC accounts. 

As a result, you can face a foreclosure. Mortgage is a secured loan, so your lender has the lien on your home until you pay off the loan. If you can’t make regular monthly payments, it gives the lender the right to repossess your home and resell it to recoup the cost of the mortgage. 

What is a foreclosure?

Foreclosure rates are high and rapidly increasing. With a combination of risky mortgages, rising interest rates, and significant home-value declines, it seems to be the last option for many homeowners. According to statistics, there were over 500,000 homes that went through foreclosure last year. 

A foreclosure is a legal way for the lending company to take possession of your home and sell it in order to use the money to cover your debt. As a result of the foreclosure, the owner loses all rights he or she had in the property.

When your home is foreclosed on, you must move out! Then the home will be probably sold at a public auction. If your property is not sold or the money is not enough to cover the debt, a deficiency judgment could be pursued against you. 

A foreclosure happens when you can’t make your mortgage payments on time. Even though the process differs from state to state, there are some general steps that are taken. However, it is important to research your state's laws.

Foreclosure proceedings can begin after the first missed payment, but it is not common. Most lenders have an established waiting period for late payments. It typically takes 30 days before the alarm bells go off. 

After the second missed payment, you will be getting some phone calls. Many lenders will only accept both late payments to bring the loan current. They also may refuse to accept a partial payment.

Once you fall three months behind, the situation will become really bad. Typically, this is when the majority of creditors will start the foreclosure process in one of the following ways: power of sale, which can be carried out entirely ¬by the creditor or judicial sale, which requires the foreclosure process to go through the court. 

Foreclosure proceedings typically start with a formal demand for payment. It is usually a letter known as a Notice of Default (NOD). The lender will inform you about their intention to sell your house and terminate all your rights in the property. 

Types of foreclosures

In most states there are two main types of forecloses:

Judicial sale
•    The lender will file lawsuit with the court system. 
•    You will get a letter from the court demanding payment.
•    Typically, you have thirty days to make payment. 
•    At the end of this period, a judgment is made on the lawsuit and the lender requests a sale of your house. 
•    The auction is carried out by the local court or sheriff's office, usually several months after the judgment. 
•    The property is sold to the highest bidder.
•    After that you will receive an eviction notice, and you have to move out of your home immediately. 

Power of sale (statutory foreclosure):
•    The lender will send you a Notice of Default and their intention to sell the property. 
•    You will have an established grace period to do something in order to stop the foreclosure. 
•    After that, a deed of trust is drawn up that temporarily conveys the property to a trustee. 
•    The auction is carried out by the trustee. 

There's one more type of foreclosure that is hardly ever used - strict foreclosure. It is available in a few states including Connecticut, New Hampshire and Vermont. In this case, once judgment is made on the lawsuit, the property goes directly back to the lender. 

Foreclosure effects

The most obvious effect of a foreclosure is that you will find yourself without a home. While some people can afford to rent an apartment while they get their finances back on track, the others may become homeless. 

Another problem is your credit rating. Generally, a foreclosure will remain on your credit report for 7 years. It will seriously damage your credit score and hinder your prospects to qualify for a mortgage in the future.

 Alternatives to a foreclosure

If you don’t want to lose your property, you have a number of options to avoid the foreclosure process. The first step is to call your lender. Most people are so scared and embarrassed that they ignore phone calls and letters from their lender. Actually, it is not recommended to do so because lenders are not interested in foreclosures as well - they will lose anywhere from 20 to 60 cents on the dollar.

Many lenders will take into account your circumstances. If you have missed just a couple of payments, they will send you a workout package that will help you catch up with your mortgage payment. 
Other options include debt repayment plans, forebearance, and loan modifications – as well as relief under the new Federal housing plan. You can also sign a deed-in-lieu of foreclosure and
deed the home back to the lender. 

If you don’t want to have the property, you can try to sell it. It may save you legal and appraisal costs while preserving the real value of the house, especially if you sell it in the early stages of the foreclosure proceeding. However, keep in mind that if you find a buyer for the property, you must be sure that the sale price is high enough to cover your total amount of debt.