A Guide to Foreclosure

Many homeowners go through financially hard times. As a result, making mortgage payments can become difficult or even impossible. When you miss too many, however, your lender may end up starting the process of foreclosure. This can significantly affect your credit report and your ability to buy another home in the future.  

To help you understand the process of foreclosure, how to avoid it and what to do if you end up having to foreclose, read on.

What is Foreclosure?

Missing multiple monthly payments can cause a lender to start the process of foreclosure, which is essentially taking ownership of your home. When you buy a home, it acts as collateral for your mortgage, and your lender can seize ownership of it to sell and make back the money.

Types of Foreclosure

There are essentially two types of foreclosure processes: non-judicial and judicial. 

Non-Judicial Foreclosure

These types of foreclosures don’t require a lawsuit or court order for a creditor to seize your home. This is typically the simplest and fastest way to foreclose. 

Judicial Foreclosure

On the other hand, a judicial foreclosure requires the lender to file a lawsuit and get a court order to sell it. Until it’s sold, you’d still legally be able to live in the home. This type of foreclosure is typically lengthy and more complicated than non-judicial foreclosures.

Reasons for Foreclosures

There are many reasons a lender may have to start the foreclosure process for your home. At any point, regardless of how long the mortgage term is for, circumstances can change, or world events can happen that can greatly affect a homeowner’s financial situation.  

Some reasons for foreclosure could include: 

• Job loss in the household 

• Outstanding debts 

• Inability to sell the home before moving  

• Natural disasters 

• Economic crises

How to Avoid Foreclosure

While lenders try their best to ensure you’re able to pay back your mortgage, you may not be able to foresee every life event that can affect your finances. So, if you ever do find yourself on the precipice of foreclosure, you may want to consider some of these alternatives instead.

Forbearance

Mortgage forbearance is a temporary, short-term suspension or reduction of your monthly payments given by your lender. This is to help in temporary financial hardship as you navigate your situation. Keep in mind that any payments that are suspended may have to be repaid with interest.

Reinstatement

After you default on your mortgage, you may have the option to pay back the total amount due in one lump sum in the form of a mortgage reinstatement. This would allow you to catch up on any late payments and fees and then you could resume your regular payment amount for the rest of your loan term.

Deed In Lieu of Foreclosure

Instead of foreclosure in which your home would be taken from you, you could sign a deed in lieu which allows you to transfer your deed to the lender voluntarily. You would have to leave the property at an agreed upon date, but this option would help you avoid some of the consequences of foreclosure.  

Repayment Plan

Speak to your lender as soon as you miss a payment, know you’ll miss a payment soon or can’t make a payment in full. They may be able to put you on a repayment plan to pay a portion of the amount you owe with each mortgage bill until you’ve paid back the full amount you owe.  

Short Sale

You may be able to work with your lender to sell your home for less than the amount you owe on your mortgage. This money would go to your lender who would release you from this debt. However, this option would also leave you without a home.

Buying a Foreclosed Home: What to Keep in Mind

Despite the negative consequences of a foreclosed home, it can be a good opportunity for investors or borrowers who are able to put in the time and money for it. However, there are some things to consider before buying: 

Hidden Costs

Foreclosed homes are typically sold as-is and often need repairs or remodeling which can get costly and be time-consuming. However, if you’re prepared to take on this project and can save money by doing some or most of it yourself, it could be worth it in the end. In addition, the property could have taxes or liens attached to them.  

Squatter’s Rights

If a foreclosed home has been sitting empty for a long time, it may hold squatters, people who occupy a piece of property with no legal claim to it. In some states, they may also be able to claim ownership of the property depending on how long they’ve been there. You may be able to evict them, but this process could take a long time, and it may not always end in your favor.

Competition

Lower prices on foreclosed homes can attract more buyers, including investors and flippers. This can put you in a bidding war which may end up in you spending more than originally planned or losing out on a property with potential. 

Slower Process

Due to the complications of buying a foreclosed home, you may encounter some roadblocks during the process including the inability to secure a loan, the response time from the owner and additional paperwork that can cost a lot of time.

Understanding Foreclosure

Whether you’re looking to avoid foreclosure or are looking at foreclosed homes to invest in, it’s important to learn about their nuances. It’s often better to be over-prepared than ill-equipped. 

This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.