Economic downturns are sometimes unavoidable and they can hit personal finances pretty hard. It doesn’t matter if there’s an economic catastrophe going on or if an individual is suffering a personal financial crisis. The result is going to be the same — less money coming in while the debt keeps piling on.
There’s probably no one who’s going to get feel the sting of a financial crisis worse than a person who’s already in debt. And there’s no debt more difficult to pay off than a mortgage loan.
We’ll explore what defaulting on your mortgage payments results in, what the process looks like, and what you can do to prevent it.
What Is Foreclosure?
When the owner can’t keep up with the mortgage payments for one reason or the other, the lender may decide to foreclose the property. In other words, the bank that lent the money to the owner can seize the property and put it up for sale. But is there something you can do before the bank claims your property? The most common question we hear is: Can I sell my house if it is in foreclosure?
Every mortgage contract has a lien on the property you purchased using the loan. The lien gives the bank legal right to take the property that you missed payment on. However, this is not something that happens immediately when the owner misses a payment. It usually takes three months of missed payments before the lender decides to step in and declare foreclosure on you.
During this period, you can choose to sell your home before it’s auctioned away. Before we explain how the whole process works, you should know the difference between judicial and non-judicial foreclosures.
Judicial vs Non-Judicial Foreclosures
The lender can decide to file a lawsuit against the property owner for defaulting on the payments, asking the court to allow a foreclosure sale. The property owner can try to defend the lawsuit, but if they lose, the property is auctioned away. Judicial foreclosures are rare as they’re not really time-effective. What’s important is that the owner can still sell the house before it goes on auction.
In non-judicial foreclosures, the process takes place outside of the court and is based on state statutes. There are several steps that comprise non-judicial foreclosures that also take the needs of the property owner into account. In general, it’s better for everyone to renegotiate a deal than evict a person and go through the entire foreclosing process.
Banks usually opt for non-judicial foreclosures as they’re cheaper and much faster than courts.
The first step that leads to a foreclosure process is a payment default, or missing out on a single payment. However, the bank is not going to send the owner a notice of default yet. It usually takes 90 days’ worth of missed payments before they send one to the property owner.
Before they send the notice, banks might reach out to the property owner in person or by phone call to try and assess their financial situation. As we’ve pointed out, it’s in everyone’s interest to try and work out a solution (usually a different payment plan with lower interest rates) than to go through with the foreclosure process. Some states even mandate that lenders reach out to the property owners and try to work out a deal before sending the notice.
Recording a notice of default at the county’s recorder’s office triggers the non-judicial foreclosure process. The notice contains information about the default, as well as what steps the owner needs to take to fix the problem. They’re usually given three months to make amends and cure the default.
The non-judicial process now enters what’s called the pre-foreclosure stage. At this stage, the owner can choose to sell the house before foreclosure goes any further. It’s a good time to sell the house because once the notice of default period is out, the house is auctioned off and the owner’s credit history is ruined.
If the owner doesn’t comply within the given timeframe, the lender records a notice of sale at the county office. A notice of sale means that the lender is effectively announcing the upcoming sale of the property. It used to be that the foreclosed property would appear in newspapers, but nowadays, both the papers and the internet are updated on the foreclosing. That’s how home buyers, investors, and house flippers find foreclosed properties.
The time and date of the auction are set on a workday, always in the 9 AM to 5 PM period.
Selling Property at the Auction
The lender can bid on the property, and they can’t bid more than the total amount owed (fees and costs included). If the lender wins the bid, the property becomes real estate owned or REO for short. After the auction, the bank is the new owner of the property and they try to sell it off to someone else.
In case a 3rd party wins the bid, the amount that the property owner owes goes to the lender. If there’s any surplus money, it goes to the borrower.
Once the process reaches the public auction stage, the property owner is completely out of control and there’s nothing they can do to prevent their home from being sold. The next step is eviction and other incredibly painful and stressful steps.
A short sale is a term that doesn’t strictly apply to foreclosures, but it’s often what happens when the banks send the notice of default. A short sale means that the bank won’t get their money’s worth from your mortgage. For that reason, the bank must approve of this step before you take it.
For example, if the house is worth $200,000 and the mortgage is $240,000, the owner would be short-selling it. That means there’s almost no equity in the property.
However, banks don’t just write off debt easily. They’re open to communication, but you’ll have to prove that you’re facing such a serious financial crisis that it prevents you from paying your debt in full.
How to Get out of Foreclosure Without Selling your Home
You don’t have too many options to avoid foreclosure.
You can either get the help of friends or parents who could gift you the money you need to cure the default. It’s better to owe someone who won’t just up and sell your home in case you’re late on a payment.
The other option is to renegotiate a better deal with the bank. The lenders are often forthcoming when it comes to restructuring the debt, as it benefits them to avoid foreclosures altogether.
Finally, you can declare bankruptcy, but that should be your last resort. It will harm your credit history for years to come and force you into credit counseling programs.
Selling a House in Foreclosure Is Possible
You can sell a house that’s in foreclosure until the auction takes place. Since you have to move fast, it’s best you hire a realtor or use an online service that offers to buy homes directly from you.
You probably won’t get as much money as you would otherwise and you’ll lose your home. However, it’s better to go back to renting a place and living debt-free (and with a relatively intact credit history) than having your home auctioned off.