What Is Foreclosure?

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When you buy a home, your mortgage is a secured loan, with your house acting as collateral. If you default on the loan, your lender can take ownership. The time frame varies by state, but typically you’re in danger of foreclosure — the legal process by which the homeowner gives up all rights to the property — once your payment delinquency reaches 90 days. Here’s what you need to know about going into foreclosure.

How Foreclosure Starts

The foreclosure process is the series of actions taken by a lender to repossess a home. It starts when you stop making mortgage payments for any reason.  Most people stop paying because they’re unable to afford the payments. Some choose to ignore their obligation because they owe more than the house is worth or are simply tired of dealing with real estate ownership. Whatever the reason, the lender can start the foreclosure process after the state’s prescribed period of time.

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How Common Is Foreclosure?

As of April 2017, there were foreclosure filings on 77,049 properties across the U.S., including default notices, scheduled auctions and bank repossessions, according to RealtyTrac, which provides foreclosure listings. That’s one out of every 1,723 houses.

Common reasons for foreclosed homes include job loss, unexpected medical expenses, divorce and death of a family member. Other contributing factors include high interest on subprime mortgages that had temporarily low introductory rates, owing more than the house is worth, or simply being in denial about mounting financial problems.

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What Happens in the Foreclosure Process?

When homebuyers stop making mortgage payments and the required time elapses, the lender files a Notice of Default with the County Recorder’s Office stating the borrower has defaulted on his mortgage loan. If you’re the borrower, this is your warning that foreclosure is imminent and you’re on the cusp of being evicted. Some states also require lenders post a public notice on your door to alert you of the pending action.

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After you get the NOD, you enter the pre-foreclosure grace period, which gives you some breathing room. The grace period lasts 30 to 120 days, depending on your state’s laws. It gives you a chance to work things out with the mortgage holder by paying off the default or making a short sale arrangement, although there’s no guarantee that the lender will agree to a short sale.

If you can’t work things out in time, an auction is set up to sell your house to someone interested in buying a foreclosed home. These auctions, also called Notice of Trustee Sales, can take place in a variety of locations. Some states allow you to claim your house by paying the outstanding amount any time before the foreclosure auction; this is known as the “right of redemption.” If you’re unable to do that, or your state doesn’t offer that right, your house is auctioned off to someone willing to buy a foreclosure with cash.

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Alternatives to Foreclosure

Alternatives to foreclosure auctions are available: The bank might agree to take the house back from you voluntarily, with what’s known as a “deed in lieu of foreclosure,” and will negotiate a price and transfer ownership. This satisfies your loan obligation and doesn’t hurt your credit rating as badly as foreclosure. However, if your house has other lien holders due to judgments or additional mortgages, your lender might prefer foreclosure to wipe them out.

Short sales are another option to prevent foreclosed homes. You and the mortgage holder agree on a sale price that is less than the amount you owe, and you search for homebuyers willing to pay it. You still owe the difference unless you get it waived as part of the short sale agreement. Lenders often require proof of financial hardship before they’ll consider a short sale.

Short sales impact your ability to qualify for a future mortgage for only two years, rather than the five-to-seven-year impact of a foreclosure. However, your credit still takes a bad hit if the lender reports the short sale to the credit bureaus.

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How Can You Avoid Foreclosure?

Contact your mortgage holder as soon as you realize that you’re in financial trouble. Don’t wait until you skip a payment. Alerting the lender immediately gives you more time to work out a plan before the foreclosure process starts.

The United States government has a Making Home Affordable Program that helps distressed homeowners, and many state housing departments also have foreclosure avoidance programs. Call the MHA hotline at 1-888-995-4673 to discuss your options.

Modifying your mortgage loan or getting a mortgage refinance to make the payment more affordable is another possible way to prevent foreclosure, letting you stay in your home. A 401k hardship withdrawal is an option that’s allowed by the IRS if you need to the money to avoid foreclosing on your home.

Foreclosure might be avoidable if you act on it quickly. If you’re in danger of defaulting on your home loan, check your state laws and resources to find out what you can do to prevent foreclosure.

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