Foreclosure

When owners are having trouble keeping up with their mortgage payments, they automatically think of "foreclosure." This word strikes fear in the hearts of many homeowners. However, we are here to explain what exactly foreclosure means and if it would be a good solution for you.  


What is Foreclosure?

Foreclosure is the legal process of forcing a sale of property by the mortgage lender to recover any possible financial loss. The property is used as collateral for the loan. This occurs when the owner of the house has missed numerous mortgage payments. Failing to pay the mortgage payments could be caused by numerous reasons such as recent unemployment, increase in interest rates, medical bills, divorce, and etc. Annually, about 1-2% of homeowners have foreclosed their property in the U.S. Once the bank forecloses on a property, the lender sells it to mitigate any financial loss.

What is the process of Foreclosure?

Typically the foreclosure process goes through five steps. First, the borrower/homeowner defaults on their mortgage. Defaulting first when the borrower misses one payment. By the second missed payment, the lender sends a notice of demand. However, many lenders are willing to work with the borrower to avoid foreclosure. If missed payments continue, within 6 months the lender will send a Notice of Default to the County Recorder's Office. By this time, the homeowner has 90 days to pay the full balance of missed payments, as called the "Reinstatement Period." If the balance is not paid then the lender issues a Notice of Trustee's Sale as the third step to the County Recorder's Office.  The lender will publish the notice in the local paper for three weeks before auctioning the property. The homeowner still has 5 days before the auction starts to pay off the missed payments and reclaim their house. The fourth step is the public auction. The property starting sell price is calculated by how much mortgage is left, owed taxes, and the cost of the sale on the property. The highest bidder gets the deed to the house and comes to the new owner.  Lastly,  if the property doesn't sell, the lender/bank becomes the owner. Please note that this is the general process and it can vary across states.

What are the repercussions of Foreclosing?

Depending on your state, after the foreclosure is finished, the mortgage holder may still have to pay the lender a portion or all of the balance left on the mortgage. It is commonly called the deficiency balance. A second repercussion, the loan defaulter has to face is the negative impact foreclosure has on their credit score for 7 years. Foreclosure can drop your credit score by 100-160 points, affecting your chances of receiving a mortgage in the future and other loans.