Foreclosure

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Foreclosure is the legal process that involves taking possession of property when a loan borrower fails to make payments to the lender. The lender takes possession of the property and attempts to sell it in order to recover the amount owed by the borrower. Mortgage lenders and lien holders are required to follow certain legal guidelines in order to start the foreclosure process. Foreclosures greatly affect a borrower’s credit rating and can cause hardships when the borrower applies for loans in the future. To explore this concept, consider the following foreclosure definition.

Definition of Foreclosure

Noun

  1. A legal proceeding that takes place when a lender seizes the home after borrower has failed to make the required payments.
  2. To deprive a borrower of the right to keep mortgaged property when payments have not been made according to the contract.

Origin

1300     Middle English – derived from the Old French word forclos which means to shut out

Grace Period

Most lenders offer a grace period for borrowers having trouble making their payments. On average, the grace period for late payments is 30 days. However, some lenders allow up to three months of non-payment before they begin the foreclosure process. This varies depending on the lender.

Foreclosure Process

Once the lender moves forward with the foreclosure process, they do so in one of two ways. Legally, lenders can go through the judicial sale process, or they can foreclose through a Power of Sale process. The process chosen depends on the lender and specific state laws. Not all states allow lenders to perform a Power of Sale.

Judicial Sale

The judicial sale process of foreclosure, which requires lenders to go through the court system, is allowed in all states. In this process, the lender files a lawsuit, after which the court sends a letter demanding payment from the borrower. The borrower then has 30 days to make the ordered payment, otherwise the court enters a judgment allowing the lender to auction the property to satisfy the lien.

Power of Sale

As of 2014, only 29 states allow foreclosures through the Power of Sale process. In this process, the lender serves the borrower with a written demand for payment within a certain amount of time. If the time period expires with no payment received, the lender prepares a deed of trust transferring the property to a trustee, who then auctions the property on behalf of the lender. As the Power of Sale process does not require legal proceedings, it often takes less time to complete. The Power of Sale process is subject to judicial review.

Foreclosure Auction

When a lender auctions off a foreclosure home, it often sets the starting price at the balance remaining on the loan. If the remaining balance is higher than the value of the property, however, the lender may simply retain ownership. Any real estate owned by the lender may then be put up for sale in a normal real estate fashion.

Short Sale vs. Foreclosure

A short sale is an option for borrowers facing foreclosure. A short sale is an agreement with the lender in which the property is sold for less than what is owed on it. If the lender agrees to a short sale, the property is placed with a real estate agent who places it on the market. If a sale is made, the foreclosure process is halted. This also prevents the borrower from having a foreclosure or deficiency judgment placed on their credit record. In its place, the credit bureaus usually report “paid in full for less than agreed,” or “settled for less.”

Example of Short Sale

A borrower agreed to purchase a home for $150,000. Due to a job loss, the borrower is unable to make the monthly payment. Because of a decline in the real estate market, the home’s current value is only $100,000, yet the borrower still owes $125,000. The bank agrees to participate in a short sale and is willing to take a $25,000 loss on the property. The home is assigned to a real estate agent who lists it for sale at $100,000. The home sells and the borrower does not face a default judgment.

After the Sale

Once the sheriff’s department or trustee auctions off the property, the borrower is served with an official eviction notice. This often requires the occupant to vacate the home immediately, but some courts will allow the tenant 30 to 60 days to find replacement housing.

Deed in Lieu of Foreclosure

Also known as “mortgage release,” a deed in lieu of foreclosure takes place when the homeowner transfers ownership of the mortgage to the bank or lender. The borrower is then relieved of the remainder of the loan, and owes no more payments. This is not an ideal solution to the problem, but buyers might want to consider a Deed in Lieu of Foreclosure if:

  • Their finances no longer allow them to afford the home
  • They are unable to refinance the loan or mortgage
  • They owe more on the mortgage than the property is worth
  • They cannot sell the home using traditional methods

While this does affect the borrower’s credit rating, it eliminates the large debt and has less impact than a foreclosure. It also allows the homeowner to decide whether to vacate the property immediately, or reside in the home for up to three months until they find replacement housing.

Avoiding Foreclosure

Avoiding foreclosure is always the best option for the borrower as it can have a negative impact on their credit rating and their ability to borrow in the future. When a borrower falls behind on their loan, it is vital for them to communicate with the lender. The majority of lenders are willing to work with borrowers to avoid foreclosure. In most cases, once a borrower gets behind, a lender will work out a payment plan to help them catch up. If this plan is not possible, or the lender is not willing to work with the borrower, there are additional steps that can be taken to avoid foreclosure.

  • FHA Assistance. If the borrower has an FHA “Federal Housing Authority” loan, they can speak with FHA counselors who will negotiate with the lenders in order to make the payments more affordable. The FHA also offers homeowners debt counseling to help get them back on track.
  • Request Forbearance. Borrowers can request a forbearance, which temporarily suspends loan payments. Many lenders will grant a forbearance for a short amount of time if the borrower agrees to pay the outstanding balance in one lump sum at the end of the forbearance period. This option is ideal for homeowners expecting a settlement or larger amount of money within a certain time frame.
  • Partial Claim. Borrowers who are able to make current payments, but cannot come up with the cash to bring the account into good standing, may find that filing a partial claim suits their needs. In this case, lenders help borrowers obtain an interest free loan that is applied to the past-due amount. Though this brings the property debt current, it results in additional monthly payments until the loan is repaid in full.

Hiring an Attorney

When a foreclosure is unavoidable, borrowers need to know their rights and the steps they need to take. While hiring an attorney can be costly, it is helpful to the borrower who is determined to fight foreclosure, or to a borrower who wishes to file bankruptcy. While fighting the foreclosure is not always possible, having a lawyer on hand can delay the process and keep the borrower in the home longer. Since attorney fees can add up, it is essential for the homeowner to weigh the cost and benefits before hiring one.

Foreclosure Lawyer

If the borrower is determined to hire a lawyer when facing foreclosure, they should be sure to hire one experienced in real estate transactions, consumer protection, and foreclosure proceedings. A real estate lawyer is just one option. When searching for a lawyer, the homeowner should ask direct questions and research the lawyer’s specialty to be sure he has specific knowledge and experience in foreclosure law.

Related Legal Terms and Issues

  • Deed – A legal document that states the ownership or legal rights to a real property. This can also be referred to as a “title.”
  • Default – Default occurs when a borrower fails to make the required payments according to their loan contract. Once they fall behind, the loan goes into default.
  • Deficiency Judgment – A judgment issued against a borrower when the sale of a foreclosed property did not result in enough funds to cover the loan or mortgage in full. The borrower then becomes responsible for paying the deficient balance.
  • Eviction – Removing a tenant from a property. In the case of foreclosure, notice is sent to the tenant after the lender has put the home into foreclosure. The notice often dictates how long a resident has before they must vacate the property.
  • Forbearance – A repayment relief granted by lenders in order to prevent foreclosure. The lender often puts loan payments into forbearance for a specified period of time. After that period ends, the borrower is required to resume full payments.
  • Grace Period – A grace period is granted by lenders during which late payments will not result in the borrower defaulting on the loan. Each lender has a specified grace period, which is stated specifically in the original contract or agreement.
  • Trustee – A third party responsible for selling the foreclosed property, either through normal real estate sale, or at auction, for the purpose of regaining the loan amount for the lender. This type of sale is known as a “Trustee Sale.”