The word “foreclosure” strikes fear into the hearts of homeowners. It is not as scary as it sounds, however. The foreclosure process is actually a protection for homeowners, rather than a means for cold-hearted lenders to take advantage of struggling borrowers. In very basic terms, foreclosure is a process which provides homeowners with substantial notice and opportunity to cure a delinquent home loan. It is important for every homeowner to have a basic understanding of the foreclosure process and how it works.
FINANCING THE PURCHASE OF A HOME.
When a consumer buys a home, he or she typically makes a down payment somewhere in the range of 20% and finances the remaining balance of the purchase price over a period of time, generally 30 years. The loan for the balance of the purchase price is a “secured” loan. This means that repayment of the loan is secured or guaranteed by collateral. In the case of a home loan, the home itself acts as the collateral. The home buyer/borrower will sign a promissory note agreeing to repay the balance of the loan under specific terms and conditions. In addition, the borrower will sign a deed of trust which will be recorded against the property. The deed of trust gives the lender a security interest in the property and allows the lender to foreclose against the property if the borrower defaults on the loan.
WHAT IS FORECLOSURE?
Foreclosure is a process that may seem harsh, but in reality was enacted not only for the protection of lenders, but more significantly for the protection of homeowners. Under the laws of most states, a lender is required to resort to the property in order to collect on a defaulted home loan. In other words, the mortgage lender is not permitted to go after the borrower’s wages or other assets, but most look to the property to resolve the delinquent balance. Foreclosure provides a process by which the lender and borrower can work together to either resolve a delinquent loan balance or, if this cannot be done, to repay the loan and relieve the homeowner of further loan obligations.
THE FORECLOSURE PROCESS.
Following are the basic steps in the foreclosure process:
1. The lender is not permitted to initiate foreclosure unless and until the borrower is in default on the home loan. Once the borrower is in default, the lender must notify the borrower of the default and give the borrower the opportunity to remedy the default and bring the loan current. It is important to note that foreclosure proceedings will generally not be initiated until the loan is seriously in default. The loan will generally be 60-90 days past due or even more before the lender will consider the serious remedy of foreclosure. For a number of reasons, it is to the borrower’s advantage to attempt to work out repayment and bring the loan current before a foreclosure is initiated. However, if the borrower is unable to do so and the lender commences foreclosure, there are still a number of options to allow the borrower to reinstate the loan.
2. Once foreclosure has been commenced, it will generally be more difficult to bring the loan current. However, all hope is not lost. The lender must wait a certain period of time before foreclosure can be completed. This means that the borrower will still have an opportunity to bring the loan current. In most cases, the borrower will, in fact, have several months during which time he or she can pay the past due amount, as well as any accrued fees, to reinstate the loan and stop the foreclosure proceeding.
3. It is important to be aware, however, that once foreclosure has been initiated, it can become much more difficult to bring the loan current. For one thing, while most lenders are still willing to work with the borrower to make payment arrangements so that the borrower can reinstate the loan, the lender’s hands may be tied to a much greater degree during the foreclosure process. And once the home is in foreclosure, instead of just bringing the loan current and paying interest and late charges, the borrower will also be responsible for paying certain foreclosure costs and, perhaps, attorney’s fees. Generally speaking, the longer the property is allowed to languish in foreclosure, the higher the charges are going to be, and the more difficult it is going to be to bring the loan current.
4. There are a number of options for bringing a home loan current even after foreclosure has been commenced. The most important thing is to act quickly. The sooner the borrower takes action, the easier it will be to work with the lender to reinstate the loan.
The first thing to do is to contact the lender and find out what options are available. Remember that lenders would much rather have the loan reinstated and continue to collect payments of principle (and more significantly, interest) than have the home sold in foreclosure. Most lenders will work with a borrower even once the loan is in foreclosure to set up payment arrangements and allow the borrower to bring the loan current before the conclusion of the foreclosure period. Keep in mind, however, that the monthly payments to bring the loan current are going to be high. They will include not only the current monthly payments on the loan as they become due, but a portion of the past-due amount and late fees, as well as a portion of the fees and charges associated with the foreclosure proceeding. If the borrower has been having difficulty making the regular monthly payments, then making significantly higher payments for a period of several months may be an impossibility. If the borrower can bite the bullet and swing these higher payments for a few months, however, the borrower can come out on the other side with a current home loan and in good position to being making the regular monthly payments on time.
If making higher monthly payments is not a realistic option for a borrower, then another option is to obtain a second mortgage based on the equity in the home. If there is sufficient equity available, the home owner can obtain a loan against that equity and use the proceeds of the loan to bring the primary mortgage current. There is a downside to this option as well, however. The borrower will have to make payments on both the primary mortgage and the second mortgage each month, which can mean a significantly higher monthly obligation. Although the monthly payments will probably not be as high as those under a repayment plan set up with the lender, they will still be higher than the previous monthly loan payments. Again, if the borrower was having problems meeting the monthly payment obligation before, this may just be putting a temporary bandage on the problem and can make it more difficult for the borrower in the long run.
A final option is for the borrower to sell the home on his or her own before foreclosure is completed. This option will allow the loans against the property to be repaid and will also allow the borrower to keep any remaining proceeds, depending on the amount of equity in the home. It may be possible in this manner to prevent a foreclosure from being recorded against the borrower’s credit rating and allow the borrower a fresh start with lower monthly obligations.
5. If the borrower brings the loan current and pays all fees and charges associated with the foreclosure during the foreclosure process, the loan will be reinstated, which means it is no longer in default and the borrower can go forward with making monthly mortgage payments on the loan as before.
If, however, the borrower is unable to reinstate the loan, the home will be sold at a foreclosure sale. Generally, the home will be sold for the minimum amount necessary to repay the loans against the property and to recoup any fees, charges and costs associated with the sale. If the home is sold for more than is due, then the borrower will receive any remaining proceeds, however this is an unlikely situation. Any and all loans, fees and charges against the property will be repaid first, and this usually leaves little or nothing for the homeowner. For this reason, it is incumbent upon a homeowner to exercise another option rather than allowing the home to be sold in foreclosure, in order to save whatever equity is in the home.
There are some other important things to keep in mind regarding the foreclosure process.
First of all, remember that a particular piece of property can have several deeds of trust recorded against it. In most cases, the primary lender will have “first position,” which means that, in the case of foreclosure, this lender will be repaid first from the proceeds of the loan before any lesser or “subordinate” creditors will be repaid. If there is a second mortgage on the property, this lender will usually be in second position. Generally, you can grant a security interest to anyone. For example, you can borrow $5,000 from your Great Aunt Fanny and allow her to record a deed of trust against the property. However, in the event of foreclosure, her loan would not be repaid until after the higher ups are repaid.
Also, keep in mind that anyone who has a security interest in the property can generally commence a foreclosure against the property if you default on the loan, so be very careful who you grant a security interest in your home to and for what reasons. It would be a shame to have to go through this stressful and expensive process because Great Aunt Fanny becomes angry over your failure to repay her $5,000 loan.
Finally, remember that foreclosure should not come as a surprise. The borrower will be given advance notice and will normally be given a number of opportunities to bring the account current or to make payment arrangements before foreclosure is commenced. Even after the foreclosure proceeding starts, the borrower will be generally be given a reasonable amount of time and a number of opportunities to cure the default and reinstate the loan. So, foreclosure does not have to mean the end of home ownership, but can be a catalyst for a fresh beginning.