Thanks to today’s tough economic times, foreclosures are making headlines in cities throughout America . Many financial situations can cause foreclosures – loss of a job, divorce, high medical bills, even simply taking out the wrong kind of loan. Whatever the reason, more and more homeowners are facing the loss of their homes due to foreclosure.
When you take out a loan from a bank, mortgage company or other lender – usually to buy a home — the lender has a security interest in the property. This means that if you can’t make the mortgage payments (or the property taxes), the lender has the right to foreclose, or take the property to satisfy the debt. Sometimes the lender may keep the property, but usually it’s sold to pay off the loan. In either case, you lose whatever rights you had to that property.
If you are facing the possibility of foreclosure, it’s extremely important for you to know the individual laws of your state. The timeline below gives a general overview of the process, and most states follow the same guidelines for the first three months. After that, though, the steps can vary.
Foreclosure begins when you don’t make your loan payments on time. Technically this process can begin the very first month that payments are late. If a payment is not made by the due date, it’s considered delinquent. Once a payment is late, or once any grace period has ended, the lender will start calling you to find out why payment has not been received. A late fee is often assessed after any grace period ends.
If the payment is 30 days late, the loan is considered in “default.” This is noted on your credit report and will negatively affect your credit score. A second letter is sent notifying you that you have breached the terms of the mortgage contract.
If the loan is 60 days past due, the lender can begin acceleration procedures. At this point the lender can require that the past due balance be paid in full (with interest and late fees), refuse to accept partial payments, or void any payment agreement and require the loan to be paid in full. You will receive a “Demand Letter” or a “Notice to Accelerate” notifying you of these decisions and stating that foreclosure is the next step.
Depending on the state, formal foreclosure proceedings begin when you have missed payments for three months. At this point you will receive a formal letter, called a “Notice of Default,” notifying you that foreclosure has begun. Your mortgage is considered seriously delinquent at this point. The lender will refer the matter to its foreclosure department; depending on the company, they may handle it internally or hire a local attorney or a third party to initiate foreclosure proceedings.
There are several different forms foreclosures can take, depending on what your state laws specify: judicial foreclosures or non-judicial foreclosures . Some states allow both forms, but one will be more commonly used. Although the end result is the same, one major difference is in the timing; a judicial foreclosure can take up to a year to complete, while a non-judicial foreclosure can sometimes be completed in as little as two to four months.
Judicial foreclosures take place in the court system. They begin with the lender (referred to as the plaintiff) filing a complaint against you (referred to as the defendant) and recording a notice of Lis Pendens. This is a notice stating that the property is in foreclosure; it prevents you from selling or refinancing it until the proceedings are completed. The complaint will state what the debt is and explain why the lender should be allowed to foreclose and take the property. You will receive notice of the complaint by mail, publication or direct service.
Once you have been notified, you must file a formal written legal Answer to the complaint, usually within 30 days. This gives you the opportunity to respond to the complaint, admitting, denying or explaining the allegations. All parties to the action must receive a copy of your Answer, and you will be charged a filing fee by the court.
Each party has time to collect supporting evidence, subpoena documents and conduct depositions before a hearing takes place. A judge or magistrate will preside and consider all the evidence and legal arguments. The lender will try to prove that you knowingly signed the mortgage agreement and that you have defaulted on the terms. If the judge finds the lender’s argument valid, he or she will rule in favor of the lender, issue a judgment for the total amount owed, including court costs, and authorize a sheriff’s sale of your property.
In many states you have a specific period of time between the date of the official order and the sale date to redeem your property by paying off the loan. This is known as the “redemption period.” Most homeowners are unable to do this, however, since it requires the payment of the loan in full, not just resuming the monthly payments.
A sheriff’s sale is a public auction open to anyone, conducted by the sheriff or a deputy. You will be notified of the sale date by mail; in some states a notice is also attached to your door. The sale notice must also be published in the local legal newspaper or in a general circulation newspaper for either three or four consecutive weeks (again, depending on the state). The sale is held in a public place – usually at the courthouse, but it can also occur in front of the property being auctioned.
At the sheriff’s sale, the property is sold to the highest bidder, which may be the lender or an outside party. The court confirms the sale, and then a sheriff’s deed is prepared and delivered to the new owner of the property. If no bids are received, the lender takes ownership.
After the sheriff’s sale, in some states you enter a second redemption period, where you again have the opportunity to redeem your property by paying the total amount owed, interest, court costs, attorney fees, title search fees and appraisal fees. If you are able to redeem your property, you will need a “Satisfaction of Judgment” from the lender, which states that you have paid off the amount owed and reinstated your rights to the property.
If you have not redeemed the property, once ownership is transferred you must vacate the premises. If eviction proceedings are needed, an eviction hearing is usually held within two weeks. You have ten days from the conclusion of the hearing to leave the property.
In a judicial foreclosure, if the sale of the house doesn’t bring in enough money to pay off your loan in full, the lender can obtain a deficiency judgment against you. This means that you are personally responsible for the difference between the loan balance and the sale price; the amount is considered a personal debt. This possibility should be discussed carefully with your attorney.
A non-judicial foreclosure takes place outside the court system. The lender claims the legal right to your property and has it sold at a public auction. Since the courts don’t oversee the process, a specified trustee is responsible for following the rules mandated by your state’s laws. The main advantage of a non-judicial foreclosure is that the lender is usually not allowed to obtain a deficiency judgment against you, no matter what the final sale price of your home is.
Typically, the non-judicial procedure begins when the lender asks the trustee to mail you a “Notice of Default and Election to Sell.” This legal document is your official notice that the foreclosure process has begun and that the lender intends to sell your home. The document may also be recorded at the county courthouse.
At this point your redemption period begins, as explained in the judicial foreclosure section, and you have the opportunity to stop the foreclosure process by contacting the trustee and informing him or her of your intentions. Most lenders will not accept partial payments, so you will likely need to pay the entire loan balance. By law, the trustee must inform you of the exact amount you will need to pay. If you are able to pay it to the trustee, the foreclosure must stop immediately. You will then receive the trustee’s notice of termination of foreclosure.
If you do not redeem the property, a Notice of Trustee Sale will be mailed to you, published in legal publications and recorded with the county. This specifies the date and time your property will be sold. After the legally specified time period has ended, a public auction is held and the high bidder takes ownership of the property.
Notification rules vary from state to state. Some states do not require a Notice of Default be sent to the homeowner; others require only the publication of the Notice of Sale. It is important for you to know the specific guidelines of your state.
A foreclosure, as well as all the late or missed payments that led up to it, will remain on your credit report for up to seven years. It will be very difficult for you to obtain credit in the future. Remember, however, that you have the right to have explanations entered into your credit report; if the foreclosure was due to circumstances such as unemployment or serious illness, be sure your credit report includes this information.
If you’re facing foreclosure, there are many organizations that can help you navigate the rough waters ahead. Contact someone at the first sign that you might need help.