Having your own house or land is definitely a big investment. However, taking a loan gives you a tremendous responsibility and commitment to keep a clean record of paying on time. Otherwise, you will lose your property on foreclosure, which can be a dreadful experience you would never want to endure.
In order for you to have a better understanding of the foreclosure mortgage process, there are some things you have to know. You don’t want to be left in a dark hazy cloud trying to figure out what to do if worse comes to worst that you can’t fulfill your mortgage obligations.
Simply put, foreclosure refers to the process by which your lender or loan company can take hold of your property (i.e. home or land) in the event that you are unable to make timely payments. Remember, when you take out a house loan, you’re automatically giving the bank, for instance, a mortgage or deed of trust. Thus, the mortgage holder, as well as other lien holders, has the legal right to either keep or sell your property. This, of course, should occur as stipulated in the terms and conditions agreed upon in the mortgage contract.
At first, the law requires that once the mortgage is in default, there is immediate ownership by the mortgage holder. Over the years, however, the law developed in order to allow borrowers to have time paying off the mortgages before losing their property. Foreclosure is a PROCESS by which a property is taken away as a result of default.
Default means one’s failure to abide by the terms of the mortgage. These terms may not only involve your obligation to pay principal and/or interest rates on time. For instance, when it comes to real estate mortgage, provisions will include payment of real estate taxes and insurance maintenance on the premises. Noncompliance to any of the mortgage stipulations ultimately results to default, and that’s when foreclosure comes in.
Nowadays, a multitude of state laws and regulations constitute foreclosure. This is to ensure that both the mortgage holder and the mortgagor (borrower) are protected from scams and unfairness. Also, a number of states in the U.S employ varying guidelines when it comes to the foreclosure law. The foreclosure method and alternative options may be different from one state to another but the principles of the foreclosure law are essentially the same.
Types of Foreclosure
Usually, the whole foreclosure process can take 6 weeks to 18 months before its completion. There are several types of foreclosure utilized in the United States. Here are some of them:
- Foreclosure by Judicial Sale – Foreclosure by judicial sale is available in all states and is the preferred method by many. This type of foreclosure entails court supervision once the mortgaged property is on sale. The proceeds will first go to the mortgage holder, and then to other lien holders, and lastly to the debtor. All parties involved are required to attend trials upon receipt of a foreclosure notification. Here, pleadings and other legal decisions with regards to the mortgage issues are made.
- Foreclosure by Power of Sale – This is basically the same as that of foreclosure by judicial sale, except that in this type of foreclosure, there is no court supervision. The mortgage holder can sell the property without the hassle of going through trials but still get the proceeds required to satisfy all the parties involved. Not all states allow foreclosure by power of sale, but a vast majority does.
- Strict Foreclosure – This was actually the initial method of foreclosing on a property, but nowadays, only Vermont and New Hampshire makes use of it. Here, the borrower has to make payments within a specific time frame. Failure to do so automatically allows the mortgage holder to gain possession of the property without being obliged to sell it.
Upon default, the mortgage holder can either keep or sell the property. Selling the property by the mortgage holder or the county representative often involves auction. Ideally, it is the investor who relays the instructions to the lender to make a bid that’s near or the same as the debt’s value. In addition, if the value of the property (selling price) is less than that of mortgage, the borrower is held accountable to the mortgage holder for the difference—and vice versa.
Doug Duncan, economist for the Mortgage Bankers Association, stated that housing markets and loan quality decline due to jobs lost and other factors that lead to foreclosures. It’s like a vicious cycle that has negative impacts on the nation’s economy.
Housing and real estate markets can sometimes take a depressing plunge into a mortgage mess due to an economic decline.
According to Teresa Gordon, a real estate firm owner in Michigan, who specializes in foreclosure, this is highly probable. She also said that aside from economy being a major factor to Michigan’s mortgage problems, the blame is also on the lenders who are too lenient and buyers who oftentimes make poor decisions. Note that Michigan ranks 3rd on the list of states with the most repossessed homes due to foreclosure, according to the Q1 (First Quarter) 2008 U.S Foreclosure Market Report.
Nationwide, the top three states with the most number of repossessed homes are: California, Texas, and Michigan.
First Quarter 2008 U.S Foreclosure Market Report indicating 156,463 repossessed homes nationwide.
The report documented all foreclosure fillings including auction sales notices, bank repossessions, and default notices. It shows that there’s an overall 112% increase in the nation’s foreclosure activity compared to last year. One in every 194 U.S households made foreclosure fillings.
It’s alarming to see that foreclosures are getting high in numbers. What’s so troubling about this is that foreclosure negatively affects not only the property owners, but also the loan company, loan investor, and the insurance agency.
Adding insult to the injury are the tax consequences that come with foreclosures. Even the Internal Revenue Service would start sending out letters asking you to pay taxes on the property lost. You will then be obliged to pay taxes unless you raise the appraisal value of your home, discuss and make arguments with the agency, or much worse, empty your credit and go into bankruptcy.
Foreclosures are not ideally seen as beneficial to all the parties involved and thus, its prevention is necessary at all costs.
Do not ignore the notifications sent to you by your lender. If you are having financial issues, do not leave your lender clueless. Contact your lender and explain the situation you’re in. Did you lose your job or perhaps, your income was delayed? There are many reasons why you may not be able to make the necessary payments.
According to Countrywide Financial Corporation, one of the leading mortgage lenders in the U.S, the primary cause of mortgage defaults is the curtailment of the one’s income. From January to July 2007, income curtailment constituted almost 60% of the overall mortgage loan defaults.
Causes of Foreclosure based on Countrywide Financial Corporation
Whatever your reasons are, remember to be prepared when you set an appointment to discuss matters with your lender. They need to know your monthly expenses and income, so prepare all supporting documents. If you give them the right financial information, they can
make payment arrangements for you. Eventually, they will offer you solutions and alternatives to prevent foreclosure.
Go to a HUD-credited housing counseling agency and inquire about the programs and services that you could find useful. The agency can even provide credit counseling. Oftentimes, the services are for free.
As mentioned, there are alternatives or remedies to prevent foreclosure. These are the following:
- Loan Modification. The lender can either lower the interest rates or extend the term of the mortgage loan. Bottom line: mortgage loan terms agreed upon initially is now changed to help you refinance your debt and make due payments. This is the best option if you have already recuperated from a financial dilemma.
- Special Forbearance. The lender may suggest a new repayment plan. Your loan payments can either be reduced or suspended temporarily. You may be given this alternative if for instance, you lost a job, or if you drained your savings due to high hospitalization expenses. However, keep in mind that you must be able to convince the lender that you can abide by the terms of the new repayment plan.
- Partial Claim. Here, you’re allowed to get a zero-interest loan from the Housing and Urban Development Agency (HUD).
- Pre-foreclosure Sale. You’re allowed to place your property on sale to prevent foreclosure. These are the requirements:
- Initial appraised value should be 70% (at least) of your debt
- Selling price should be 95% of the initial appraised value
- Sell the house within the months stipulated by your lender
- Deed-in-lieu of foreclosure. This entails you to give your property to the lender. As terrible as this may be, at least you will not thoroughly hurt your credit rating. You may apply for another loan.
On a last note, to prevent such unfavorable events from occurring in the first place, make sure that you have ample resources to make timely payments. Make careful decisions.