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The Anatomy of a Foreclosure
It's no secret that the economic crisis is affecting most people hard-especially many
homeowners who simply can't afford the monthly mortgage payments and are faced with
foreclosure. On a typical day, around 8,500 homes are foreclosed on in the United
States, and by the end of 2008, a record 3 million homes were being foreclosed-an
increase of over 100% from the previous year. Foreclosure is the process by which a
bank or other mortgage lender can recoup the amount owed on a mortgage loan by
taking ownership of or selling the property.
But how does a homeowner actually get to the point where their home is taken away
from them, and how does the process work? If you are a homeowner struggling to pay
the mortgage each month and are getting further and further behind, you are taking the
first steps towards having your home foreclosed. Most of us are late with a mortgage
payment occasionally, which isn't really a problem-but once you become several
months behind, the process begins. Keep in mind the foreclosure process may vary
slightly depending on which state you own property in.
Once a homeowner is late with a mortgage payment, they generally receive a politely
worded letter from the bank pointing this out. If you are more than a month behind, the
letters may become less polite; the bank will also probably call you in an effort to solve
the problem. If you are a homeowner in this situation, it's always a good idea to call and
speak to your bank; most banks and lenders would much rather work with you to reach a
solution than place your home in foreclosure.
If a homeowner gets to a point where they are even further behind with their
mortgage payments-typically three to six months - the bank will generally then send
you what is known as a notice to accelerate. This basically informs you that you are
behind with payments and must catch up, otherwise legal action will be taken in the form
of a foreclosure. If you still don't respond, the bank's next step will probably be to hire an
attorney who will also send you a letter-known as a demand letter-basically saying
the same thing.
If you are in this situation, take a look at the papers you signed when you bought your
home - most lenders also put a clause in the original contract stating the same thing-
that the lender can legally foreclose on the home if payments are not kept up.
Depending on the state you live in, this clause-known as an acceleration clause-may
be regulated by the state, allowing you to avoid foreclosure by making late payments. In
some cases, the clause states that a homeowner who defaults on their loan is
responsible for the total of the interest financed, as well as the principal.
If you don't respond to the notice from your attorney, your lender will then file a notice
of default with the County Registrar, which therefore becomes public knowledge. A
notice will also appear in the legal section of your local newspaper. If the homeowner
does sell the home before the notice of default is given, it is known as a pre-foreclosure.
At this point if you are behind with your mortgage payments, you would be expected to
pay the entire delinquent amount, including any late fees, and possibly attorney's fees,
just to catch up again.
One option you have if you are facing foreclosure is known as a short sale. In a short
sale, a buyer is found who offers to purchase the home for less than the amount that is
still owed on the property. It's worth the lender's while to agree to a short sale, as they
will get the foreclosed property off their hands; a foreclosure is actually costly for the
bank, as they may have to wait months to re-sell the property. And the bank is also
losing money on a foreclosed property as they are responsible for paying property taxes
and insurance while the home sits unsold.
Otherwise, the next step in the foreclosure process is that the court will set a date to
auction off the foreclosed property; again, a notice appears in the local paper. The
homeowner, the lender and any third financial party will all need to be present in court on
the designated date. Anybody can attend the auction and once the auction is over, the
winner is given a purchase contract by the lender. Any real estate taxes are then paid
from the purchase amount and the lender gets to recoup some of their losses; if there is
anything left, it goes to the original homeowner.
It's important to understand that while foreclosure can be a devastating experience, it
can be avoided and there may be other options. A lender is just as anxious to avoid
foreclosure as a homeowner is. If you are struggling to pay your mortgage, your first step
is to contact your lender-don't just do nothing.
