Foreclosure is defined as steps taken by lender when the borrower defaults on repayment of loan. In this the lender takes legal control of the mortgaged property and sells the asset (property) in order to recover the loan amount.
Types of Foreclosure
#1 – Judicial
This is the usual foreclosure which happens where a lender will inform the borrower of the missed payments and to further when the borrower fails to revive from being the default, the lender sues the borrower and it is filed in the country recorder’s office. The case is put on the public record and after the trial, the property gets auctioned.
#2 – Non-Judicial
Here the lender has full authority for selling the property when the borrower defaults. Here too the case will be recorded in the country recorder’s office and the borrower will get time to make up for the default failing which the lender has to right to immediately go for the auction or the sale of the property and here the difference is there will be no extensive trial or judiciary proceedings.
The process varies from state to state but overall, they have 5 similar characteristics –
#1 – Payment Default by Borrower
When the borrower misses at least one loan payment he is put in default criteria. The lender will send a missed payment notice stating that they have missed the payment and even offer a 15 days grace period to make the payment. After 15 days the borrower will be charged late payment and other penalties to him/her. If the borrower misses two to three payment he will be sent now a demand notice which is more grave than a missed payment notice.
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#2 – Notice of Default (NOD)
When the borrower misses on payment for three to six months the lender will send a notice of default to the office of the country recorder. A copy of this is also sent to the borrower who further gets 90 days to pay the recent bill and reinstate the loan. This period is called the reinstatement period.
#3 – Notice of Asset Sale
If the borrower still cannot make the payment within 90 days the lender begins with the process of foreclosure. The lender will send again notice to the country recorder’s office abut the same with one copy to the borrower and publish a legal notice in the newspaper too for three consecutive weeks before the home gets actually auctioned. The borrower still has five days before the auction to make up for the missed payments.
#4 – Public Auction
The lender will estimate an opening bid for the property before it gets auctioned. The price is estimated based on the balance of loan pending and any kind of lien or taxes which are not paid. The property gets sold to the highest bidder. The trust deed is passed on to the new owner of the property and the borrower has now 3 days to vacate the property.
#5 – Real Estate Owned Property
If the property doesn’t get sold in the auction it becomes the property of the bank or a real estate owned property. When this takes place the lender is the owner of the property and it will try to get the property sold by means of a broker or an agent. To make the deal more alluring the lender may remove some part of lien chargers and other charges thus giving some form of discount to the interested party for buying the considered property.
In an auction, the lender generally sets a bid prior to the auction based on the price which is estimated taking into consideration the balance of loan pending and any kind of lien or taxes which are not paid. This notification is also given in local newspapers and websites for interested buyers to come forward for the auction.
On the day of the auction based on the pre-set bid auctioneers are allowed to bid for prices above it. The purpose of the auction is to get the highest possible price of the property. The person with the highest bid or the amount which is sufficient for the lender to cover up the loan is considered and the property gets handed over to the person.
The borrower has three days’ time to vacate the property and hand it over to the new owner. On the other hand, if the lender doesn’t get good bids in the auction, the lender will take over the property and try to sell it in the future through brokers or agents.
How to Avoid it?
- One most important step to avoid foreclosure is to avoid missed payment of loans and becoming a default.
- One should take some time from the lender in cases of dire emergencies before being coming into the trouble of legal action. This is called forbearance.
- If one can agree that after a default one will never repeat the same the lender might give the borrower a break and waive off the obligation which is called debt forgiveness.
- When the lender spreads out the missed payment amount for a longer duration it gives some sort of ease to the borrower.
- When the lender agrees to change the terms of the loan or extend the amortization period this may give some flexibility to the borrower.
Consequences of Foreclosure
- One has to let go of his/her own home and any kind of equity that was put forward.
- It brings about stress and anxiety because one becomes homeless without knowledge of the fact where to go next.
- It does a lot of damage to the credit score and getting a second loan in the future becomes very tough.
- One may owe a deficiency balance even after the foreclosure sale.
- One may lose opportunities for leasing or assistance which may be available further.
- Under the Fannie Mae mortgage process, one will lose the ability to purchase another house for another seven years.
- It is on the credit rating which gets hit drastically.
- Homes get available at a cheaper rate than the actual market price.
- It creates an opportunity for new home buyers to purchase homes that are reduced prices.
- Even after foreclosure, the borrower may have to compensate for the deficit in the loan.
- Problems in employment into certain fields where the credit rating of the candidate is checked.
- When the real estate market falls low, many owners will find their house not worth of mortgage. In these scenarios, it may be good for owners to reduce their burden and start fresh.
- It is beneficial for new home buyers who will find property at cheaper rates.
- It is also a way to save money. When the borrower realizes that there is no way to prevent the foreclosure from taking place one can stop trying and save the money which was otherwise used for making monthly payments and start over fresh when the foreclosure end.
- The credit rating gets the hardest hit and falls drastically.
- One loses his/her own home and in such crisis time finding a new home is very difficult.
- It also affects employment where in some kind of job credit background of individuals is checked.
- Getting a new loan or mortgage becomes very difficult.
- When foreclosure happens it increases the tax burden of the borrower becomes in the eyes of IRS the debt is forgiven is considered as an income.
This has been a guide to Foreclosure and its meaning. Here we discuss foreclosure auction along with its process, types, and consequences. You can learn more about corporate finance from the following articles –