Foreclosure Explained

Foreclosure happens when a loan is defaulted on and the lender recovers the amount owed by selling or taking ownership of the property.  In plainer words: You stop paying and the bank takes the house back and you lose possession. Keep in mind that the foreclosure process can vary from state to state, but there is a general cadence to the process. The purpose of this article is to give a very broad overview of the process itself and not considered advice of any sort.

Now that that is out of the way, we can continue…

So in the event a payment is missed, the lender will reach out via letter or phone and there will be a late fee added.  If a second payment is missed, the lender will likely follow up by phone and often to make arrangements with the borrower to prevent falling further behind. Contrary to popular belief, the bank DOES NOT want your house. They want the mortgage to be serviced (meaning you pay it) and they collect their interest.

After the third month of missed payments, a letter called a notice of default (NOD) is sent.  It is a public notice that gives the borrower 30 days to remedy the past due payments before formally starting the foreclosure process.  Most lenders will not send a NOD until the borrower is 90 days past due, and generally federal law prohibits a lender from starting foreclosure until the borrower is more than 120 days past due.

Next, paperwork is filed with the necessary courts to formally start the process since a foreclosure is essentially a legal action more than a financial one.  The lender’s attorney or foreclosure trustee will schedule a sale of the property and the sale is advertised by the lender in the weeks leading up to the auction.  The timeline from the NOD to the auction date can be as quick as 2-3 months.  It is still possible at this point for the borrower to contact the lender and make payment arrangements or pay the amount due (including attorneys fees).

If arrangements can’t be made and the sale proceeds, the property is placed for public auction and will be awarded to the highest bidder who meets all the requirements.  Once the deed is awarded to the highest bidder, the property is then owned by the purchaser, and they are entitled to immediate possession.  If the previous owners are still living in the property, they are issued an order to evacuate, which demands that anyone living in the house must vacate immediately.  If needed, local law enforcement can step in to remove the occupants and impound any remaining belongings.

Throughout the foreclosure process, most lenders will make several attempts to make arrangements for the borrower to get caught up.  It is in everyone’s best interest to try to work something out before getting too far down the line of this process. After the housing crisis of 2009-2010, the mortgage companies are looking for ways to keep people in their homes. It costs money for them to hold the properties and they are usually in a rather distressed state.

If you should find yourself falling behind on payments or missing ones here and there, the best place to start is talking to your lender. A call to your realtor doesn’t hurt either if you wanted to strategize on how to approach. Always here to help my friends.

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