What is foreclosure?
When you took out a loan to buy your home, one of the many documents you signed was a mortgage or a deed of trust. In this document, you granted your lender a security interest in your home to ensure repayment of the loan. In the event you failed to make a payment or defaulted on the loan in any other way, the mortgage or deed of trust gives your lender the right to force the sale of your home to recover any outstanding debt. The process a mortgage lender goes through to enforce its security interest is known as foreclosure.
What happens in foreclosure?
The foreclosure process differs in each state. Some states, like Florida and New York, require lenders to file a foreclosure lawsuit in court; this is called a judicial foreclosure. In nonjudicial foreclosure states, like California and Texas, lenders are allowed to foreclose without having to go to court.
All states require lenders to give some sort of notice to borrowers before the foreclosure sale. Notice requirements and time periods for borrowers to respond vary from state to state. For example, in California lenders are required to personally contact borrowers 30 days before mailing a 90-day notice of default, which is then followed by a 20-day notice of sale. Whereas in New Hampshire, the lender need only personally notify the borrower 25 days before the foreclosure sale and publish notice 20 days in advance. To find out what the law is in your state, contact a legal aid office in your state. (To find a local legal aid office, do an online search for your state and the words “legal aid.”)
How to deal with foreclosure
Although most security agreements give lenders the right to foreclose after just one missed payment, most lenders won’t enforce their foreclosure right until after you miss a few payments. Once you know that you’ll no longer be able to make your monthly mortgage payment, you should contact your lender immediately to see what options other than foreclosure are available to you. You can also get help from a free foreclosure avoidance counselor approved by the U.S. Department of Housing and Urban Development (HUD). To find a counselor near you, visit the HUD website’s page on foreclosure at www.hud.gov/foreclosure and click “Talk to a foreclosure avoidance counselor.”
Here are some of the foreclosure alternatives that you may want to investigate:
- Mortgage reinstatement. To reinstate your mortgage, you would need to make up all of your missed payments, plus interest and fees. Once you do this, the terms of the mortgage are reinstated, or restored. In effect, you and the lender go back to your roles before the foreclosure started. Some states require lenders to give borrowers a chance to reinstate their mortgage for a certain period of time. But even if your state doesn’t require it, these days lenders are willing to offer reinstatement to borrowers whose financial problems were only temporary.
- Forbearance. In forbearance, a lender lowers or eliminates a borrower’s mortgage payment for a few months. The missed payments are then added to the principal to be repaid at the end of the loan period. Like mortgage reinstatement, forbearance might be a good option if you expect your financial problems to be temporary.
- Modification. In a loan modification, the terms of your loan are modified to lower your monthly mortgage payment and make the mortgage more affordable. Loans can be modified by lowering the interest rate, extending the repayment period, or even reducing the principal. You may be able to modify your loan through one of the federal government’s loan modification programs, including the Home Affordable Modification Program (HAMP). To see if you qualify, visit www.makinghomeaffordable.gov. If not, it’s possible (although not likely) that your lender may offer modification outside these government programs.
- Refinance. To refinance, you would take out a new, more affordable mortgage (either from your current lender or a different lender) to pay off your old mortgage. A refinance will be nearly impossible if your mortgage is underwater, or you owe more money than your home is worth.
- Short sale. In a short sale, you would sell your house for less than the amount that you owe on your mortgage. If you have the financial resources, you would then pay off the deficiency (the difference between the outstanding debt and the sale price) to fully pay off your mortgage. Otherwise, you would need to ask your lender to approve the short sale and release its lien on your home. If you decide to pursue a short sale, you should ask your lender to release you from liability for the remaining debt; get this release in writing. Without this written release, your lender may be able to go after you for the deficiency after the sale closes.
- Deed in lieu of foreclosure. In a deed in lieu of foreclosure, you sign your home over to your lender, and your lender cancels your mortgage. If your lender already started foreclosure proceedings, the foreclosure is also cancelled. As in a short sale, you should get in writing from your lender a release from liability for any remaining debt.
If you’re facing foreclosure, you may be considering filing for bankruptcy. To find out how bankruptcy may help you avoid foreclosure, see our article, Using Bankruptcy to Stop Foreclosure.
