Are you facing a difficulty or expect a problem in paying your mortgage? Unlike other loans, you risk losing your home to foreclosure if you continuously default on mortgage payments. Understanding what rights and options are available to keep your loan current and how the foreclosure process works can help make informed decisions about your situation.
What causes a mortgage foreclosure situation?
There are many reasons you may find it difficult to service your mortgage. Some are job loss, divorce, natural disasters, and unexpected life events. You may also face short-term constraints because of pandemic-related reasons.
Missing one or two payments will cause late fees. However, your mortgage is not at risk if you resume making regular payments after that. Missing three consecutive monthly payments is concerning. If you cannot settle this amount or arrange a plan to keep payments current, the lender may take the first of many steps to foreclose on your mortgage.
Mortgage foreclosure and its adverse effects
When you got a loan from the bank to buy your home, you mortgaged or pledged your home as collateral for this funding. By foreclosing, your lender is exercising its rights to sell your house to recover the loan, interest, and other expenses due on your mortgage.
Since lenders inform credit bureaus of customer defaults and foreclosure actions, your inability to pay your mortgage negatively affects your credit rating. A foreclosure affects your credit rating for seven years. It can also affect your tax payments. Such adverse facts make it difficult to qualify for another loan or get new housing.
How can you prevent a foreclosure on your mortgage?
Note that servicers are keen to avoid the cost, time, and effort involved in foreclosing on a loan. Instead, they prefer to work with you to prevent one, which results in a win-win for both parties.
In fact, the Consumer Finance Protection Bureau (CFPB) has approved new rules effective from Aug 31, 2021, through Dec 31, 2021, to safeguard borrowers who may face difficulty in paying their mortgages during the present time.
A lender may not send the first notice or start a foreclosure filing for a principal residence mortgage during this period if the borrower faces payment issues. However, there are three safeguards available to lenders where they may still proceed with such foreclosure action. (For an explanation of these rules, visit library.nclc.org/new-cfpb-rule-protects-homeowners-facing-foreclosure/)
Did your lender agree to defer payments under a pandemic-related mortgage forbearance plan? If you foresee difficulty paying dues after the moratorium ends or already face such issues, inform your lender immediately. Inquire about getting relief in terms of the new CFPB rules. Your lender may modify your loan and offer a new payment plan that includes the missed payments.
Here are other ways to prevent a mortgage foreclosure:
If possible, settle all dues within the grace period the lender offers.
- Arrange a new payment plan with your lender.
- If the value of your home has appreciated, your lender may approve refinancing. You would get a new loan to settle amounts outstanding and a new repayment plan.
- With the lender’s approval, you can sell your home to a third party and settle all dues.
- Get the lender’s approval for a short sale of your home. Here, the house’s sale value is less than the amount payable to the lender. In some states, lenders take a loss for the difference. In others, they post a note of deficiency for this amount. Check how this rule works for your state.
- Sign a deed-in-lieu of foreclosure with your lender. This way, you avoid foreclosure by transferring ownership of the property to the lender.
- Seek advice from a HUD counselor (apps. hud.gov. offices/hsg/sfh/hcc/hcs.cfm) or an attorney on ways to prevent defaulting on your loan and avoid foreclosure.
Choosing any of these options will help to avert a foreclosure of your mortgage and the negative impact it has on your credit rating. Some of these options mean losing your home. However, renting or buying another property is easier then. If none of these choices are possible, you face the prospect of your lender taking foreclosure action.
How does the foreclosure process work?
There are two primary laws relating to loan foreclosures. In some states, lenders resort to foreclosure by judicial sale and seek a court ruling to sell a property to recover the loan, missed interest payments, and other expenses. This process can last for more than a year.
In contrast, if you live in a state where you bought your home by signing a deed of trust, the lender’s representative or trustee resorts to a non-judicial power of sale. This foreclosure process is also called a trustee sale. Your home is sold by auction, and foreclosure of the loan takes a shorter time to complete.
According to federal law, a lender can start a foreclosure process only after you have missed payments for over 120 days. You will receive notices of proposed foreclosure action before then. Even after this process starts, you can stop it by paying the amount due or working out a payment plan with the lender.
How does the mortgage foreclosure proceed?
Suppose the law that applies to your mortgage is a foreclosure by judicial sale. In that case, your lender will sue to recover the amounts due. The court then notifies all parties, holds a trial, allows pleadings, and gives a ruling. Assuming the lender gets permission to auction the property, you will receive a notice of foreclosure sale stating the total amount due and the date by which to vacate the home.
What if you live in a state where the applicable foreclosure law is a non-judicial sale? Typically, you will receive a Notice of Default (NOD) within 30-60 days of first defaulting on your loan. The lender files a public notice of the NOD in the County Recorder’s office. Some states require a display of this notice on the home’s front door.
The NOD gives the payment amount to make your mortgage current and, when it is due, usually within 90 days. This letter points out the risks of missing payments, including foreclosure, and ways to resolve this. You will receive advice to contact a housing counselor to discuss your options.
In a power of sale, the trustee records a Notice of Trustee Sale (NTS) with the County Recorder’s office detailing the sale and notifies the borrower. If the borrower does not settle all dues, the sale by auction takes place on the date the trustee specifies.
If the home does not sell at the auction, the lender submits a bid for the amount outstanding and takes over ownership. Classified as real estate owned (REO), the lender sells the home by listing it with a real estate agent or liquidation. In a liquidation sale, the lender may not recover the total costs of the loan.
Up to the time the house is sold, you may raise funds to redeem the mortgage and stop a home from foreclosure. Some states extend this right for a period after a foreclosure sale. Clarify with your lawyer the date by which this “right of redemption” ceases, as it can be subject to different interpretations based on laws in effect.
Save your home from foreclosure
Difficulty in servicing your loan is a problem. However, there are many ways to prevent the financial and emotional toll resulting from foreclosure. Communicating with your lender is key to working out a solution. By understanding your choices, you can overcome your situation in the best possible way.