If you’re in a situation where foreclosure seems imminent, you
may be wondering, just how does foreclosure work? There are some
important things you must know about foreclosure, especially if it seems
you might have one in your future.
Foreclosure is a process that
is used by lenders to claim property used as collateral against a
mortgage loan. As much as the rising foreclosure rate has made the news
lately, lenders would really rather not foreclose on your house.
Although
it may seem quite the opposite when the collection letters and phone
calls come streaming in, lenders would rather work out the problem and
avoid foreclosure. They’re not in the real estate business, and selling
foreclosed properties costs them a good bit of resources. Having to sell
the properties at a loss, which is often the case, leads to even
greater losses for the lender.
Sitting on a huge portfolio of
foreclosed properties, rather than receiving a steady income stream from
mortgage payments can cause major problems for the lender. The real
estate market in many areas is soft, making properties difficult to
sell. In many cases foreclosed properties need substantial renovation
before they’re sold, another reason lenders would rather avoid a
foreclosure situation altogether.
For the above reasons, being
proactive and trying to work out a foreclosure avoidance solution should
be the first course of action if you fear your home may be in danger.
If that fails and it seems foreclosure is unavoidable, here is how
foreclosure works and what you can expect.
First, you typically
must be 60 days behind on your payments before a foreclosure begins.
Before you reach that milestone, you will typically be contacted when
your first mortgage payment is about 30 – 45 days late. Do not avoid
this contact. It may be your best chance to work out your foreclosure.
After
you’ve been contacted or contact has been attempted by the lender, the
next step in the foreclosure process is usually a letter sent by the
lender to you demanding payment. This is a formality. Typically the
letter states that you, the borrower, have 30 days to make the
delinquent payments and any late charges that have been assessed.
At
this point your delinquency has been reported to the credit reporting
agencies, so your credit score will have suffered. That is a huge reason
to try and work something out before you are actually delinquent.
The next step in the foreclosure process usually
occurs at about 60 days after the lender should have received the
payment. At this time, the lender will turn the delinquent account over
to their legal department to begin formal foreclosure proceedings. Their
first step is usually to hire a local law firm to initiate the actual
foreclosure. In some cases the lender may keep a local firm on retainer.
It’s
at this point in the foreclosure process that the proceedings are made
public. It is a law in most jurisdictions that foreclosure notices must
be made public. The foreclosure notice is recorded at the county
courthouse. They details of your foreclosure and delinquency will be
published in the legal or real estate section of your local paper. In
other cases they’ll be posted at the county’s website or at the
courthouse itself.
In many cases, the lawyers retained by the
lender will plead their case before a judge in a formal foreclosure
proceeding. If the judge approves it, your house will be readied for
sale to the highest bidder. This usually occurs at about 120 days after
the payment was missed. Some states allow non judicial foreclosure
proceedings, and some allow either judicial or non judicial
foreclosures.
There is a huge difference in the actual foreclosure
timeline depending upon the state where the property lies, however. For
example, the process period in Texas, Georgia, and Tennessee are very
short, 27 days, 32 days, and 40 – 45 days respectively. On the other
hand, New Jersey, Illinois, and New York have much longer foreclosure
process periods, at 270 days, 300 days and 445 days.
Some states
also allow what’s termed a “redemption period” where you’ll actually be
granted the right to buy your house back from the auction winner. If
your state has such a period the length of it varies. In California,
Missouri and Alaska it’s one year, while Minnesota allows 5 years. On
the other end of the spectrum, Massachusetts, Texas, Florida, and
Georgia, among other states, allow no foreclosure redemption periods.
If
you’re facing possible foreclosure, the most important thing is to be
proactive. Contact your lender and attempt a solution. It’s in both
party’s best interest to do so. You don’t want to have a first hand look
at how the foreclosure process works.