Foreclosure is a legal process by which the lender or the bank tries to recover the amount borrowed by the homeowners. State Law governs the foreclosure process in every particular state. No homeowner will ever want to experience foreclosure. The families lose their homes and are forced to move out. Foreclosures lead to a negative emotional and social impact on families.
🎯Important: Within a month or two after the first missed payment, the borrower’s credit report starts showing the foreclosure. This foreclosure lasts in the credit report for seven years.
What Does Foreclosure Mean?
Foreclosure is a legal process where the lender gets the authority to possess the property of the borrower and recover the amount borrowed by the homeowner. The lender then sells the property to recover the remaining amount. The ownership of the property gets transferred to the bank/lender. The homeowner suffers the situation when he is not able to pay the loan.
To understand foreclosure better you need to know the following three terms:
- Foreclosure: It is a legal process. The ownership gets transferred to the lender/bank when the homeowner fails to pay the loan amount.
- Home in Foreclosure: A home in Foreclosure is a property that is undergoing the foreclosure process. It might also get auctioned later.
- Foreclosed Home or REO: Foreclosed Home or REO is a property that has undergone the foreclosure process. Later, it is owned either by the bank or the lender.
Types of Foreclosures
There are two types of foreclosures: Judicial Foreclosure and Non-Judicial Foreclosure. Here is a detailed explanation of both terms:
Judicial Foreclosure
In Judicial foreclosure, your mortgage company files a lawsuit against you in court. A Judge needs to sign the sale order to proceed with the foreclosure process. The lawsuit will be regarding the payments that you have missed. You have the chance to respond and can also make a defense. All the existing states can follow the judicial foreclosure process but some states exclusively need to follow judicial foreclosures, like Ohio and New York.
Opening pleading: It is often called a “petition” or “complaint”. The lender asks the court for the right to sell the property of the borrower and recover the debts. The lender may also ask the court for a deficiency judgment. The borrower will be held responsible for the remaining payment after the foreclosure process. Well, all states are not in favor of deficiency judgment.
Responsive Pleading: You must respond to the lawsuit when the lender files the court case. You must file an answer to the complaint to dismiss the case. If you do not file the responsive case, then the lender will ask the court for a default judgment. After which he will win the case automatically. You should file the case only if you have the right argument.
Then comes the discovery stage, where both parties learn about the evidence possessed by the opposite parties. The judgment can be passed based on the discovery process.
Non-Judicial Foreclosure
The lender has to follow state law to complete the non-judicial foreclosure. States like California, Arizona, and Nevada follow non-judicial foreclosure along with many other states. But the steps vary from state to state that the lender has to follow. The steps that lender should follow are:
- Will send the notice of default to ensure that you are behind your payments.
- Record the notice of default (county records).
- Will send you a notice of sale, mentioning the sale date of your home
Following a non-judicial foreclosure, you may face a lack of judgment lawsuit, as per state law. As there is no judicial process, the state may allow the lender to send just a notice of sale. It may be a combined notice of default and sale. Non-judicial foreclosure may also be followed by publishing a notice in the newspaper. Posting the notice somewhere on the property or somewhere public can also be done.
You can only fight back a non-judicial foreclosure by filing a lawsuit. After which the case will proceed in the same manner as judicial foreclosure.
What is Foreclosure Process?
The US has started witnessing foreclosures again from September 2022. It is 9% less than in August 2022 but 113% more than the previous year. Every state works according to its laws and legal practices regarding foreclosures. Let’s discuss the steps involved in the process of foreclosure:
Step 1- Missed Payment
The situation of foreclosure starts with the “first missed payment” of the loan. Usually, the lender gives a grace period of about 15 days, to pay back your loan amount. So that you can get back on track without any default.
You will suffer a late fee charge if you do not clear the missed payment within the grace period. Some lenders may not be friendly enough and might report to the credit bureaus about your late payments.
Step 2- Payment Default
If you continuously miss paying the loan amount, you will be considered a defaulter. Before considering you a defaulter lenders give you a time limit of 15 to 30 days. Now it depends on whether you are having a judicial or non-judicial foreclosure.
When there is no “power of sale” and the decision completely depends on the judge, judicial foreclosures take place. The non-judicial foreclosure takes place when the lender has the “power of sale” and is allowable under state law. Non-judicial foreclosure is easy, less expensive, and faster as compared to judicial foreclosure.
Step 3- Notice of Default
Your lender will file a “notice of default” if you are opting for judicial foreclosure. If you don’t respond on time, the judge will grant the lender a default judgment. A case trial can be put up if there is no response from your side. The judge could file a motion of summary judgment considering that there isn’t any genuine dispute about the foreclosure.
In case of non-judicial foreclosures, the lender can automatically issue you a “notice of default”. County Registrar keeps a record of the NOD. It includes the amount you owe, past-due payments, foreclosure costs, and late fees. You have 90 days after receiving the NOD to repay the loan amount. You can also come up with a repayment agreement upon discussing it with your lender.
Step 4- Pre-Foreclosure
Pre-foreclosure refers to the duration between the NOD and the property’s sale. The borrower has the opportunity to pay the remaining amount and come out of the foreclosure. Till the time of pre-foreclosure, you are the legal owner of the property.
Step 5- Notice of Sale
The lender will send you a notice of sale if you are not able to pay back the amount in the given time. This notice can be posted on the property or printed in the local newspaper. After the proceeding, the lender will start preparing to put your home up for auction. He will decide the date and time of the auction.
Step 6- Eviction
Now, if you are unable to pay the lender, your home will be sold off at auction. You need to vacate the place after your home is sold in the decided time period.
How to Stop Foreclosures Near You
The process of foreclosure differs across states. You need to know about the status of your state regarding foreclosure, legal formalities, paperwork, and documentation. Click on your state to know “How to Stop Foreclosure” works in your state.
What to do With the Profits from a Foreclosure Sale
It is not possible that you get the exact amount from your home’s foreclosure sale. The amount may be higher or lower than the loan amount. Both situations are possible. Any additional funds over the loan balance are not due to the lender. Any profit amount that came from selling the house will directly go to the borrower. The lender will not get any amount above the owed amount.
What Happens if the House Sells for Less?
When the house sells for less than the loan balance, the lender refers to it as a “Deficiency Judgement”. This is the lawsuit that the lender files against the borrower to demand that the borrower pay the remaining amount.
For instance: If your home sells for only $350,000 and your mortgage loan costs $450,000, the balance due is $100,000. The lender will try to get the remaining amount back from you.
Not all states follow this rule. Some states even have anti-deficiency laws and even restrict deficiency judgment after foreclosure.
How Credit Score is Affected by Foreclosure?
Foreclosure brings many negative aspects along with it, one of which is a negative credit score. Foreclosure is a severely negative process that knocks down 100 points or more from your credit score.
Missed payments top the list of negative events. Along with the foreclosure, missed payments also add to the damage made to the credit score. your credit score suffers, even before the foreclosure process begins.
Know How to Prevent Foreclosure Situation
Even if you have fallen behind the payments you still can keep up with the payment. You only need to be aware of the ways and also not ignore the problem. Act quickly according to the ways suggested below:
- Face the Problem. You don’t need to avoid the problem as it will become bigger. If you fall behind, it will be harder for you to bring your house back.
- Talk to your Lender About the Problem. Lenders only want to recover the loan amount they lent. They don’t want to occupy your house. They have options to help borrowers pay back their loan amount.
- Respond to Lender’s Mail. You must read each email as soon as you begin receiving notifications. It contains crucial information and ways to avoid foreclosure. You may also get some help regarding financial problems. Later on, emails may include notices regarding pending legal action.
- Know Your Rights. Read your home documents thoroughly so that you understand all the terms and conditions regarding the lender’s rights. Read carefully about the foreclosure laws of your state.
- Foreclosure Prevention Options. You must be aware of the options available to tell you about how to prevent foreclosure on your home.
Final Words
Throughout the foreclosure process, the borrower has the opportunity to either avoid or stop foreclosure and keep the home themselves. Judicial and non-judicial, both are ways of foreclosure depending upon the law of the state. You can get rid of foreclosure. Your credit score will suffer for seven years if you experience foreclosure. There are ways to avoid foreclosure situations immediately after the first missed payment. You have the option to halt the foreclosure if you fail to make the required loan payment. Before your home gets auctioned, you have some time to save it.
Also Read
- VA Loan After Bankruptcy: Read to know more.
Frequently Asked Questions
What is the concept of foreclosure?
Foreclosure is a legal process that allows lenders to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. The foreclosure process varies by state, but in general, lenders try to work with borrowers to get them caught up on payments and avoid foreclosure.
How does foreclosure work in USA?
Foreclosure occurs when a homeowner is no longer able to make mortgage payments as required. This allows the lender to seize the property, removing the homeowner and selling the home, as stipulated in the mortgage contract.
What is the biggest cause of foreclosure?
Major reasons for foreclosures are:
Debt, particularly credit card debt. Medical emergency or illness resulting in a lot of medical debt. Divorce, or death of a spouse or partner who contributed income. An unexpected big expense.
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