Just the word foreclosure is enough to strike fear into the hearts of homeowners. The idea of losing the place we call home because we have fallen behind on our mortgage payments is a terrible one. On the other hand, the word foreclosure is exciting to eager homeowners seeking an investment property. The problem is that many people, including real estate professionals, are confused about foreclosures.
Generally, having to foreclose on your home is disappointing, but it is not the end of the world. Once you understand what the foreclosure process entails and know what steps to take before, during and after a foreclosure, you will feel more prepared. Plus, those who are considering investing in a foreclosure property will have a better idea of what the process looks like and what to expect during the sale of a foreclosure home.
Table of Contents:
- 1. What is a foreclosure home?
- 2. What do you need to know about foreclosures?
- 3. What happens when a house is foreclosed by a bank?
- 4. What is the foreclosure process?
- 5. What will happen if I foreclose on my home?
- 6. Who conducts a foreclosure sale?
- 7. Can you get out of foreclosure once it starts?
- 8. How long can I stay in my home after foreclosure?
- 9. What should buyers know about investing in foreclosed homes?
- Before You Say Goodbye
1. What is a foreclosure home?
According to USA.gov, “Foreclosure is a situation in which a homeowner is unable to make mortgage payments as required, which allows the lender to seize the property, evict the homeowner and sell the home, as stipulated in the mortgage contract.”
As a result, a foreclosed home refers to a real estate property that is being sold by the bank that has seized the property. When the homeowner ceased making payments, it gave the bank that granted the mortgage loan the ability to begin the foreclosure process. As a part of the process, the bank will try to sell the home to get back some of the money it invested.
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2. What do you need to know about foreclosures?
There is much to know about foreclosures, but what homeowners, buyers and real estate professionals should know up front is that it is a process. And, the foreclosure process can be lengthy.
Foreclosure is also not an immediate consequence of missing a payment. For example, mortgage lenders will not start the process of foreclosure over a late payment. Generally, lenders give homeowners a grace period of 10–15 days for late payments.
However, if the homeowner is not merely late on payments but has missed payments, the lender may start the foreclosure process. The foreclosure process will only be initiated by the mortgage lender after the homeowner has been delinquent paying the mortgage for more than 120 days.
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Additionally, many people do not know that there are three different types of foreclosures.
- a) Strict – A strict foreclosure requires the home to be worth less than the current mortgage. If this requirement is met, then the mortgage lender must seek approval from the court system to reclaim the home and sell it themselves. The court system sets a deadline for the owner to pay the defaulted loan. If the deadline is not met, the home transfers back to the mortgage lender immediately.
- b) Judiciary – As the name suggests, this type of foreclosure relies on the judicial (court) system. In this foreclosure, the mortgage lender files a lawsuit against the homeowner. Homeowners are given some time to pay off the debt, but if the debt is not paid off, the home is sold at a public auction by the local sheriff’s department or a court official.
- c) Non-Judiciary – In contrast, this type of foreclosure does not rely on the court system. Instead, the mortgage lenders act on their rights according to the state laws, such as the power of sell clause. In non-judiciary foreclosures, the process moves quickly, and the homeowner has little time to reverse the process.
Another thing that is important to know is that foreclosure laws are different from state to state. Depending on the state, the phases of the foreclosure process may have different lengths, and homeowners may have different options.
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3. What happens when a house is foreclosed by a bank?
Unfortunately, when a house is foreclosed by a bank, it takes years for the owner to recover. For example, nearly 7.8 million foreclosures happened during the 10 years between 2007 and 2016. When you see numbers that high, it is hard to see the individuals they represent. Foreclosures happen to real people – no matter their socioeconomic status.
During this housing crisis, one family lost their home of over 40 years after the father figure was forced into early retirement. Suddenly, they didn’t have money to cover their mortgage through Wells Fargo in 2010. MarketWatch shares the story of the aftermath:
“In the following years, the Landis attempted to apply for loan modifications and filed for bankruptcy before finally being forced out of the home. […] After they had to leave the home, the Landis ‘begged’ several landlords to give them a chance despite their poor credit. […] The Landis moved to Florida where they bought another home. Because their credit was destroyed by the previous foreclosure, Maria Landi said they now pay a [FHA] mortgage with a very high interest rate.”
We share this story because it is important to understand what happens when a house is foreclosed by a bank. It is a lengthy and tedious process that destroys credit and requires years to recover financially.
But, you may be asking, “What happens to the home?” Foreclosed homes are sold in “as-is” condition. As a result, they may be sold for less. This is because the lender wants to get the property off his or her hands as soon as possible. If the house is not sold in a foreclosure auction, the lender will put the home on the market to sell as either a bank-owned property or real estate owned (REO) property. While the bank owns the property, the bank pays property taxes, insurance and general maintenance fees.
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4. What is the foreclosure process?
As a reminder, foreclosures are a process and do not happen overnight. Before a mortgage lender can begin the foreclosure process, the homeowner must be at least 120 days delinquent in mortgage loan payments. Once it has been established that the mortgage loan is in default, the four phases of foreclosure begin. As mentioned previously, the amount of time for each phase varies depending on which state you live in.
- a. Notice of Default – This is a formal notice presented to the homeowner explaining they are in default.
- b. Time to Pay Off Default Loan – This is the period of time given that allows the homeowner to pay off the default loan.
- c. Notice of Foreclosure Sale – If the time has passed and the deadline was not met, the mortgage lender will give notice of a foreclosure sale. This notice is recorded at the county recorder’s office, given to the homeowner, published in a local newspaper and posted on the door of the property.
- d. Public Sale – The home is auctioned off. If the home is not purchased at the auction, the mortgage lender takes possession and is now considered a real estate owned (REO) property.
You may have heard the term “pre-foreclosure” used in the real estate world. Basically, this refers to homes where the foreclosure process is already taking place. Pre-foreclosure technically begins with the notice of default and continues until right before the mortgage lender assumes possession of the home. This also means the homeowner can potentially stop the house from being foreclosed during the pre-foreclosure time frame.
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5. What will happen if I foreclose on my home?
If you are in the unfortunate situation where you will foreclose on your home, there are several things that will happen beyond losing your home. As HGTV explains, “Foreclosure has major legal, tax and credit consequences. Foreclosure will heavily impact your ability to borrow money in the future, so make sure you’ve exhausted all other options first.”
When you foreclose on a home, it will affect you financially. The foreclosure will remain on your credit report for seven years. And it will prevent you from being able to buy another home for at least three years. However, as the Federal Reserve Bank’s Resource Guide for Foreclosure Recovery notes, “The good news is that the impact of foreclosure decreases over time, particularly if the former homeowner is able to reestablish a positive payment history on other credit lines and debts.”
Many people are also shocked to learn they may be held responsible for taxes relating to the sale of the foreclosed property. For instance, if the bank performs a cancellation of debt during the sale of the foreclosed home, you may be held responsible for paying taxes.
Let’s say your mortgage balance was $180,000, and the new fair market value of the house is only $160,000, the bank may choose to cancel the additional $20,000 debt. The issue with the cancellation of debt is that tax law treats debt forgiveness as financial gain, which means you are responsible for paying taxes on the $20,000.
In contrast, let’s say your home sells for less than the debt you owe. This is known as a deficiency. In these cases, the lender can request a deficiency judgment, which allows the lender to seek more money from the homeowner to cover the loss. It’s important to note that deficiency judgments are only allowed in certain states.
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Now, let’s talk about your possessions. In short, your personal property belongs to you, so you can take it out of the foreclosed home. However, any home fixtures that are affixed to the home, such as sinks and appliances, cannot be removed. As far as appliances, items such as stoves and microwaves that are considered affixed must remain, but refrigerators and washers and dryers can be removed. If you leave possessions behind in the foreclosed home, the new owner is allowed to keep, dispose of or sell the items.
It’s also important to know your rights as you go through the foreclosure process. For example, people often mistakenly believe that they must evacuate the home while they are going through this process. This is not true! You remain the homeowner until the title goes to a new owner (typical the lender). Since the length of time of foreclosure varies, you may remain in your home from a few months to more than a year.
Additionally, some states have a redemption period that gives the homeowner a certain amount of time to buy back the home after the foreclosure sale. In these states, you may even be allowed to continue living in the home during the redemption period (in addition to the time you lived in the home throughout the foreclosure process).
Since there are a variety of foreclosure circumstances, many homeowners going through the process find it helpful to speak with a local foreclosure attorney.
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6. Who conducts a foreclosure sale?
Who conducts a foreclosure sale largely depends on the laws in the state where you live. In states where judicial foreclosures are prominent, a local sheriff or court official conducts judicial real property sales since these foreclosures are handled through the court system.
States where non-judiciary foreclosures are prominent are also known as “deed of trust” states. A deed of trust involves the borrower, the lender and a trustee. It is the trustee who then conducts the foreclosure sale. The trustee’s purpose is to ensure the sale is fair and reduces the debt owed as much as possible.
It is also important to note that during the COVID-19 pandemic, the Federal Housing Finance Agency (FHFA) announced a foreclosure moratorium through at least August 31, 2020, to help homeowners at risk of foreclosure due to the coronavirus financial burdens. So, while the local government and the lender have the ability to conduct foreclosures, during times of national emergencies, the United States government can overrule.
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7. Can you get out of foreclosure once it starts?
The good news is that even if you have received a notice of default and the foreclosure process has begun, you can still get out of foreclosure. Of course, it is better to avoid the process altogether, if possible. For example, if you are no longer able to make the mortgage payments, you may want to consider selling your home before you are forced to foreclose.
If you are struggling to make your mortgage payments, you may be allowed to pursue mortgage forbearance. Mortgage forbearance allows the homeowner to put payments on pause or reduce payments for a limited amount of time. This does not erase or reduce your total debt; instead, it provides the homeowner time to find financial footing. The homeowner will still be required to pay the debt.
You may also try to refinance your home before the foreclosure process begins. If you act before the foreclosure process, you put yourself in a better position to lower your mortgage payments to an affordable level with a new loan than you will after your credit score reflects your foreclosure.
If you do receive a notice of default, the most effective way to get out of foreclosure is to make payments. If you start making payments regularly again, your mortgage lender is less likely to foreclose on your home.
Instead of simply accepting foreclosure, you should talk to your mortgage lender. HGTV explains, “Lenders are not in the business of managing real estate, so they would rather work with homeowners to keep them in the house.” See if your lender will allow for loan modifications to allow you to keep your home.
If you simply are no longer in the position to pay the mortgage, you can request a short sale. A short sale means selling the home for less than the mortgage. What you will owe after the short sale depends on the state where you live. While a short sale will still affect your credit, it is still a better option than foreclosure.
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Another way to stop foreclosure proceedings is to file for bankruptcy. Declaring bankruptcy will pause or possibly stop the process. However, it largely depends on the type of bankruptcy you file. For example, if you file for Chapter 7 or Chapter 13 bankruptcy, then a court will grant an “automatic stay,” which stops all collections. Depending on your situation, you may be allowed to stay in your home. But, it is critical that homeowners understand there are serious financial consequences to filing bankruptcy.
If the previous options do not work for your situation, you may want to consider lawyering up and contesting the foreclosure. There are a few defenses that may work against your foreclosure. Your defense may be technical, such as not being given enough time to remedy the situation. Or, your defense may be substantive, such as you not actually being in default.
You may also want to see if your bank will do a deed in lieu of foreclosure. This doesn’t happen often, but it may be worth a try. A deed in lieu of foreclosure essentially means you transfer the title of the home over to the bank (or lender) with the lender releasing the homeowner from payments.
Finally, you may find it beneficial to speak with a foreclosure counselor. The USA.gov website provides the following resources:
• The Making Home Affordable (MHA) Program Website
• The MHA Hotline: 1-888-995-HOPE (1-888-995-4673)
• FHA National Servicing Center at 1-877-622-8525
• US Department of Housing and Development (HUD) Foreclosure Avoidance Counseling
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8. How long can I stay in my home after foreclosure?
As discussed previously, you do not have to move out of your home as soon as the foreclosure process begins. You are allowed to stay in your house until the foreclosure process is complete (or when the title transfers to the new owner).
How long you can remain in the home after the foreclosure sale depends on where you live. For example, some states have a redemption period, which gives the former homeowner an opportunity to buy the home back. However, if you remain on the foreclosed property after the legal time has passed, you can be evicted.
At this point, you will need to find a new place to live. With a hit to your credit score, this makes finding a place to rent difficult. Ideally, it is better if you find a place to rent before the foreclosure is reflected on your credit score. You should be doing your best to protect your credit and build it back up, but even so, you may want to search for rentals that do not require credit checks, such as those rented by a single landlord rather than a company. You should also anticipate paying a higher security deposit, having a cosigner, and being asked about your foreclosure directly.
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In order to be a homeowner again, you will need to rebuild your credit and recover financially. And this will take time. You can make this happen by paying your remaining bills on time and avoiding incurring new debt (such as taking out car loans).
You should also use your credit card for small purchases and pay the credit card off each month. Unfortunately, the foreclosure may make it difficult to get approved for a new credit card right away. If this happens, you should apply for a secured credit card. It is important to have a credit card and use it wisely to boost your credit score.
Additionally, the length of time before you can get approved for a mortgage depends on the circumstances of your foreclosure. For example, if it is proven your foreclosure was due to extenuating circumstances, such as job loss or medical emergencies, you may be able to receive an FHA ( Federal Housing Administration) loan as soon as one year after a foreclosure. Otherwise, you may have to wait between three to seven years before you are approved for a mortgage loan.
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9. What should buyers know about investing in foreclosed homes?
On the opposite side of the spectrum are those who are considering investing in foreclosed homes. Many buyers see foreclosed homes as a way to make money by purchasing a home for less money. However, there are some things to keep in mind if you want to buy a foreclosure.
Most real estate owned properties are sold in “as-is” condition, which means you may have a lot of issues in the home you need to fix to make the home livable. Additionally, foreclosed homes do not require disclosures, so you will not be informed about issues like roof damage, leaks or mold. This is why it is critical for potential buyers to get a home inspection. If issues are found, you will likely not be able to make repair requests or negotiate a lower cost, but it will help you determine if you want to invest in the property.
You can buy a foreclosed home in two ways. One is through a public auction, and the other is to wait until after a bank takes possession and sells it through a real estate agent. At an auction, you must pay in cash in full for the foreclosed property. In contrast, if you wait until the property is considered an REO, then you work directly with the bank’s real estate agent like you would for a traditional home purchase.
Also, buying a foreclosed home will not happen as quickly as purchasing a regular home. Since these properties are bank-owned, they tend to take longer to close in comparison to traditional closings of 30–45 days.
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Before You Say Goodbye
No one wants to go through the foreclosure process and walk away from their home. It is a sad situation for everyone involved – especially if there are extenuating circumstances that have made it difficult to pay their mortgage.
Fortunately, there are many steps homeowners can take before they reach foreclosure. Lenders do not want to take people’s homes. Lenders aren’t real estate agents, and they don’t want to have to turn around and sell a property. They’d much prefer to work something out with the homeowner to keep them in their home.
As a homeowner, you can take the initiative to stop the foreclosure process before it begins by contacting your lender and requesting a temporary loan modification. If the situation is dire and you can’t stop the foreclosure process before it has already begun, you still have options, such as a short sale or declaring bankruptcy.
A foreclosure is a process, which gives the homeowner time to remedy the situation. You will not receive a notice of default and be kicked out of your home the next day. By speaking with a foreclosure counselor and a local foreclosure attorney, you will have a better idea of your state’s foreclosure laws and your personal options.
Whether you are a homeowner in fear of losing your home or a real estate professional seeking knowledge to help potential investors, we hope this article has explained all the ins and outs of the foreclosure process. If you like this article, please share it on your Facebook page so others can benefit from it as well. Thanks you in advance!
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