Foreclosure is a term you’ve probably heard before. In 2008, foreclosure rates approached levels that hadn’t been reached since the days of the Great Depression. If you’ve never experienced a home foreclosure (or come close), it might not be something you know too much about. Still, it doesn’t hurt to know what to expect in case your own financial situation takes a turn for the worse.
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What Does Foreclosure Mean?
Keeping up with payments on your mortgage can be challenging. If your interest rates are too high and you can’t seem to come up with enough money to pay your monthly bill, you’re not completely out of luck. You could try refinancing your loan or applying for a loan modification through the government’s Home Affordable Modification Program (HAMP).
Your home won’t be foreclosed overnight, so if you’re behind on your payments, it might not be too late for you. But if you don’t qualify for any special programs and you’ve exhausted all of your other options, a foreclosure is the final straw. It means that you’ve defaulted on your loan and your lender has no choice but to take your home and sell it in order to pay the debt you owe from your mortgage.
The foreclosure process looks a little different from one state to another. Some states say that lenders can’t begin a foreclosure without getting the courts involved. Others don’t require mortgage holders to seek help from the courts at all.
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How the Foreclosure Process Works
The whole process begins once you fail to pay your mortgage after one month. Your mortgage lender might give you an official notice of default letter with details about the amount of money you owe and how you can submit your late payment. Or you could get a phone call.
Technically, you’ve now entered into the pre-foreclosure stage, so it’s important to act quickly to avoid a foreclosure. Ignoring your lender or letting the letter sit around in your mailbox won’t do you any good.
You’ll generally have two choices. You can find a way to somehow cover your missing payment. If that’s out of the question, you can try to get your lender to agree to a short sale. By taking this route, you’ll be able to sell your own home at a lower price that doesn’t have to cover the whole loan amount. The bank will get at least some of their money and you will be done with the problem.
Sounds good right? Keep in mind, though, that you’ll be hurting your credit score and you’ll have to turn over quite a few documents to get approval before moving forward.
If a second month goes by and you’ve done nothing to alleviate your situation, you’re probably going to receive more phone calls from your lender. After a third month of not making your mortgage payments, your lender might slap you with a notice of acceleration that basically gives you 30 days to get it together.
Maybe your lender will be willing to negotiate and agree to a new payment plan that works for you. If you happen to miss your new deadline the following month, it’s a good idea to be prepared to chat with your lender’s lawyer. If your lender has had enough, this may be the time they start foreclosing. Or, you could have one last chance to get help from a counselor or adviser.
When a foreclosure date has been chosen for your home, you’ve almost reached the point of no return. Unless you can finally pay up or talk to your lender and make some magic happen before that day arrives, you will likely lose your home.
Once your home has been sold, you might have some time to stick around before you have to leave the premises. In some instances, you might be given a redemption period where you can take back your home if you suddenly have the cash available to pay for all of the costs that have accrued.
Related Article: Buying a Home After Foreclosure
The Types of Foreclosure
The exact course of events in a foreclosure varies by state. There are two main types of foreclosures: foreclosure by judicial sale and non-judicial foreclosure.
In a judicial foreclosure, your notice of acceleration is the equivalent of a lawsuit from your lender. Following the 30-day extended payment period and any additional time you might be able to gain, the court in your county or the sheriff’s department will sell your home through a public auction. From beginning to end, everything could take up to about 700 days.
Often referred to as power of sale or statutory foreclosures, non-judicial foreclosures don’t take nearly as long. Some states favor judicial foreclosure while others (including Georgia and Arizona) permit a power of sale if that has been specified in someone’s mortgage terms. Instead of relying on the courts to handle everything, your mortgage company is in charge of finding someone to buy your foreclosed home.
A third type of foreclosure (called strict foreclosure) is carried out in a limited number of states, usually whenever the total debt owed has exceeded the home’s actual worth. The homeowner will still get hit with a lawsuit. However, instead of the lender having to find a new owner for the foreclosed home, the home automatically reverts to the lender.
Losing a home to foreclosure is definitely not a preferred outcome and we hope you’ll never find yourself in that situation. If you do have to go through a foreclosure, it’s important to find out how the process will go down in your particular state.
Having a good relationship with your lender is also key. He or she might allow you to pursue a short sale or come up with a brand new schedule so you can afford your loan payments and skip foreclosure altogether.
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