Foreclosure

Foreclosure explained

The legal procedure through which a lender seeks to recoup the amount owing on a defaulted debt by seizing and selling the mortgaged property is known as foreclosure. Default usually occurs when a borrower fails to make a certain number of monthly payments, but it can also occur if the borrower fails to satisfy other requirements of the mortgage agreement.

Foreclosure process

The legal basis for the foreclosure process is a mortgage or deed of trust contract, which allows the lender the right to utilize a property as collateral if the borrower fails to meet the conditions of the loan agreement. The foreclosure process begins when a borrower fails or skips at least one mortgage payment, however it varies by state. After then, the lender sends a missed-payment notification, indicating that the previous month’s payment has not been received.

The lender will send a demand letter if the borrower misses two payments. Although this is a more serious situation than a missed payment notice, the lender may still be ready to work out a plan for the borrower to make up the missing payments.

Option to avoid foreclosure

Even if a borrower has missed one or two payments, there may still be options to avoid foreclosure. Among the choices are: The borrower can pay back what they owe (including missed payments, interest, and any penalties) by a particular date to get back on track with the mortgage during the reinstatement period.

Short refinance—A short refinance is one in which the new loan amount is less than the existing sum, and the lender may forgive the difference to help the borrower avoid foreclosure. If the borrower is experiencing a temporary financial hardship, such as medical expenditures or a reduction in income, the lender may agree to lower or suspend payments for a certain period of time.

Consequences of foreclosure

If a property fails to sell at a foreclosure auction, or if it never went through one in the first place, lenders—usually banks—take possession of it and may add it to a portfolio of foreclosed properties, commonly known as real estate owned (REO).

Banks’ websites usually provide listings for foreclosed properties. Real estate investors may be attracted to such buildings since banks often sell them at a discount to their market value, putting the lender at a disadvantage.

A foreclosure appears on a borrower’s credit record within a month or two following the first missed payment, and it stays there for seven years. The foreclosure is removed from the borrower’s credit report after seven years.

 

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