A foreclosure takes place when a homeonwers fails to repay their debt in full and defaults on their mortgage. To make up for the loss, the lending institution will sell the property to repay the debt. Sometimes the cause of this event happening is determined by unwise financial decisions on the borrowers behalf. However, in today’s financial crisis, some of the main causes of foreclosure is job loss, income reduction, high credit card bills, subprime loans, or other events of that nature.
There are many key elements and different factors that make up a foreclosure and the foreclosure process. One of the key points to keep in mind about this process is the fact that the timeline and requirements mortgage lenders have to follow will vary from state to state. This means that while foreclosure may only take up to three months in one state once the borrower becomes delinquent, other states can take up to a year or more to complete the foreclosure process. Also the fact that lenders are completely overwhelmed with foreclosures will have an effect on how long the process will take.
Below is a previous article that we had posted on LoanSafe that details the process:
Day 1 – Borrower misses first payment by a day. No penalties assessed at this time
Day 16-30 – A late charge is assessed to the borrower’s payment.
The lender or mortgage servicer will attempt to make contact with the borrower for an explanation.
Mortgage notes usually carry a grace period, 15 days is typical but some are as short as 10 days. Many people “play the float” that is, delay through most of the grace period before making payment, and no one, including the lender thinks very much about it.
On day 16, however, a late fee is assessed. At this point there are no ramifications beyond that late fee and maybe a “friendly reminder” call from the lender’s customer service department. The late payment probably won’t even show up on the borrower’s credit report. On Day 30 that changes. At that point the borrower is in default and things quickly turn serious and the foreclosure process speeds up.
Past day 30, some lenders will allow a borrower to make a partial payment of the past due amount; others will insist that everything be brought current; lenders may even return a check if it does not cover both the current and the past due payments and maybe the late charges as well.
Day 45-60 – The servicer sends “demand” or “breach” letter to the borrower stating the mortgage terms that have been.
The borrower is given only 30 days to resolve the delinquent amount.
By day 45 the phone calls from the mortgage collectors will be coming pretty regularly. Most states have rules regarding collection activities and telephone calls including their frequency during this phase of the foreclosure process, content (no threats are permitted), and timing (early morning and late night calls are generally off limits,) but the calls, within legal boundaries, will be unremitting and the tone can vary from “gee, we just want to help” to aggressively demanding.
Day 90-105 -The servicer refers the loan to its loss mitigation department / foreclosure department and retains an attorney or other firm to handle the foreclosure proceedings. Depending on the state where the home is located, the servicer’s representative may record a notice of default at the local courthouse and it will be published in the local newspaper
About 60 to 90 days after the initial missed payment the lender will send a notice of default, usually by Certified Mail, giving the borrower a finite period in which to cure the situation by paying all past due amounts, and by now collection costs are probably being added to the late fees. Once that remedial period passes, the collection department will refer the loan to the lender’s legal department which will, after another period of time, send the documents to a local attorney to begin foreclosure proceedings. By this time serious legal fees are accruing.
Day 150-415 – A notice of trustee Sale is filed and the home is scheduled to be soldat foreclosure sale or auction. This time range varies due to individual state laws and requirements.
States with judicial foreclosures / where foreclosures are done via the court system, can sometimes extend this period to a year or more.
The law in most states gives the homeowner every opportunity to stop the process leading to foreclosure, right up to the minute that the auctioneer’s gavel comes down and sometimes even beyond. In some states there is a period after the foreclosure during which the homeowner can redeem the property (right of redemption.).
Redemption Rights: The rights of redemption, as specified in Internal Revenue Code Section 6337, are quoted as follows:
Sec. 6337. Redemption of Property. (a) Before Sale. – Any person whose property has been levied upon shall have the right to pay the amount due, together with the expenses of the proceeding, if any, to the Secretary at any time prior to the sale thereof, and upon such payment the Secretary shall restore such property to him, and all further proceedings in connection with the levy on such property shall cease from the time of such payment.
(b) Redemption of Real Estate After Sale.
(1) Period. – The owners of any real property sold as provided in Section 6335, their heirs, executors, or administrators, or any person having any interest therein, or a lien thereon, or any person in their behalf, shall be permitted to redeem the property sold, or any particular tract of such property at any time within 180 days after the sale thereof. (2) Price. – Such property or tract of property shall be permitted to be redeemed upon payment to the purchaser, or in case he cannot be found in the county in which the property to be redeemed is situated, then to the Secretary, for the use of the purchaser, his heirs, or assigns, the amount paid by such purchaser and interest thereon at the rate of 20 percent per annum.
Nonjudicial foreclosure states can foreclose in as little as two months.
Day 150-415 – Some states offer what is called a redemption period after the foreclosure sale in order to give the borrower time to purchase the property if they have the ability. However, most will be forced out of their home by the local sheriff’s department.
Non-judicial foreclosure: The mortgage lender will pursue a non-judicial foreclosure if there is a power of sale clause in the mortgage or deed of trust. Unlike judicial foreclosures, the mortgage servicer will not have to go through the court system to complete the sale. This is because the power of sale clause actually pre-authorizes the lender to take the home back and sell it if the borrower fails to repay the loan.
Depending on the state the borrower is located, they will generally have about three months after missing payments before they will be declared in default. Once in default, they will be served a Notice of Default (NOD) to inform them of all past dues along with additional fees they have acquired. If the borrower does not attempt the repay the debt or work out a solution to the problem, a Notice of Sale will be filed and the home will be sold at a public auction sale.
Judicial foreclosure: During this process the lender must get approval from the courts in order to take the home from the borrower and repay the debt. Once the borrower has defaulted on their loan (amount of months will vary state to state) the mortgage servicer will contact their attorney and have them file a “lis pendens” or pending lawsuit. This is to notify the public of the action and also prove the borrower is in default. After the court approves the claim a judgement will be issued and the home will be scheduled for a public auction sale.
Again, it is important to remember that each state will have it’s own specific guidelines so please do your best to understand your states laws. If you do not, you home can be foreclosed before you know it!
If you are in a position were you can no longer manage your monthly payments due to a financial hardship, it would be wise to contact your lender right away to discuss a possible loan modification. With a loan modification the borrower may be able to catch up on delinquent payments by rolling the past due to the back of the loan, lower their current interest rate, get out of adjustable rate mortgages, or possible even extend the loans terms to keep the payments as low as possible. But in order to accomplish this, the borrower must prove the hardships they claim are real, and also that they can actually afford the home but just not the loan they have been given.
However, in many cases the lender will come to a conclusion that the they cannot afford the home even with a lowered payment. When this happens they must seek another solution to prevent foreclosure such as a short sale or deed in lieu.
Fully understanding how a foreclosure works will allow you to have an edge in any situation that has to do with the foreclosure of your property or home. You will be much more beneficial to your home and financial stability if you can grasp the process in its entirety.