What is a Foreclosure?
By Pat Giannetti
Foreclosure is a process that allows the bank or financial institution holding the mortgage of a house to recover the amount owed by the homeowner. This process gives the bank legal ownership of the property and allows them to recover the funds by selling or taking complete ownership of the home.
Stages of a Foreclosure
Pre-foreclosure:
The foreclosure process begins long before an actual legal foreclosure is official. The process begins when a homeowner misses payments, usually three to six months, and is not able to financially repay the amount; this is referred to as defaulting on the home loan.
When this happens, the bank or financial institution files a public default notice, called a Notice of Default or the legal term, Lis Pendens.
Foreclosure:
After the Notice of Default, a lender will mail a certified foreclosure letter, called the Notice of Sale, to the homeowner and make a public and legal notice of foreclosure with the County Recorder’s Office. Soon after, the court will issue the lender a foreclosure and set a date for a public auction of the property.
During this time, the homeowner can still try to arrange payback with the lender, but the amount owed is usually expected to be paid in full and contains additional fees.
Foreclosure Auction:
On the day of the foreclosure trustee sale, the property is auctioned off to the highest bidder – anyone can participate in the auction, although a minimum deposit must be made in advance.
When the auction is closed, the winner gets a purchase contract issued by the lender and a closing date is set. There is a redemption period after the auction, in which the original homeowner can buy the property if the finances are provided.
Negative effects of a foreclosure on a bank
A common misconception is the bank automatically wins when a foreclosure happens. Yes, sometimes the bank does get the money that is owed and the homeowner looses the property, but in most cases, the bank loses time, money and resources in dealing with a foreclosure. A foreclosure is an expensive process for a bank, legal fees, resource expenditures, home maintenance and real estate taxes add up.
If no one buys the property at auction the bank will take the property and it becomes Real Estate Owned (REO) in an attempt to sell the house. During this costly process, the bank has to pay upkeep on the house and additional real estate fees.
Negative effects of a foreclosure on a homeowner’s credit
For some, foreclosure is unavoidable and many consequences result. It is important to be aware of the repercussions of a foreclosure. The negative effect on a credit score is probably the most serious consequence and might be the first thing in everyone’s mind, but there are more penalties and lasting effects from a foreclosure.
Missed Payments
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One 30-day late mortgage payment can drop your FICO score 50 to 100 points.
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With more than one 30-day late payment, lenders will not approve a borrower for a mortgage or refinance within 12 months preceding their application for credit.
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All lenders will charge higher interest rates and give tougher terms for missed payments.
Foreclosure
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If a home is lost to foreclosure the homeowners credit score will drop 250-280 points.
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It will take approximately three years of on-time payments to restore the credit score
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A foreclosure can be emotionally devastating and cause additional stresses
Legal Repercussions from a lender
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If a lender does not get back the amount the house was worth at market-value, the company might report the loss to the IRS and accredit the homeowner as the cause prompting the IRS to pursue a portion of the money.
5 actions to prevent a looming foreclosure
When a Notice of Default is filed, options are limited. However, there is always hope. Here are a few suggestions that may prevent foreclosure:
1. Talk to your lender
Most individuals are embarrassed about going through a foreclosure, and dealing with the collection calls, a homeowner may come to hate their lender. But, don’t refuse to speak with them and stop communication. Call the lender as soon as possible; be open and honest about your situation. Sometimes lenders workout payments plans and have other creative methods to avoid foreclosure (it is expensive for them too).
2. Sell your home
Talk to a real estate agent to find the market value of the home. Selling the home will satisfy the defaulted loan and if the home has appreciated since the purchase, you may realize a profit.
3. Consider Short Sale
If the home has appreciated since the purchase, a short sale, or selling a home below market value, may be the best way to avoid foreclosure. If the home has decreased in value, you or a real estate agent may have to negotiate with the lender to get cooperation and approval, but a short sale is still an option. If a lender allows you to sell your home and forgive a portion of your mortgage, the short sale will hurt your credit.
4. Sign a Deed-in-Lieu of Foreclosure
Just as the name indicates, this is deeding the home back to the lender instead of a foreclosure. The lender then forgives the mortgage, canceling the foreclosure. Be warned: a deed-in-lieu can negatively affect your credit.
5. Bankruptcy
Bankruptcy stops the foreclosure process dead in its tracks. By federal law, filing bankruptcy prohibits debt collectors, including your mortgage lender, from continuing collection activities. Although bankruptcy does buy more time to pay debts, it wipes out any credit, which could take years to rebuild. The law requires the mortgage company to work with the homeowner to provide a reasonable payment plan.
Benefits of buying a foreclosure
The greatest and most obvious benefit of buying a foreclosed home is the cost, which will result in a below market price. According to realtytrac.com, a real estate website that tracks foreclosure trends, the average cost of a foreclosed home was sold 25% below market value.
If a buyer gets his or her mortgage from the lender selling the property, discounted closing costs and a lowered interest rate may be offered by the lender. Also, foreclosures happen in neighborhood. A buyer could get into a great area or neighborhood for less.
The extra money saved on the property could be used to add upgrades to the home, increasing the value.
