In the foreclosure legal process, a lender takes ownership of a mortgaged property and then sells it in an effort to recoup the money that is still owed on a loan that has been defaulted on by the borrower. Default occurs when a borrower fails to make a certain number of the required monthly payments; however, it can also occur when the borrower fails to meet other terms that are outlined in the mortgage document.
A legal process known as foreclosure enables loan providers to recoup the money they are owed on a loan that has been defaulted upon by seizing ownership of the mortgaged property and then selling it.
The process of foreclosure can vary from
state to state, but in general, lenders will attempt to work with borrowers in
an effort to help them get caught up on payments and avoid foreclosure.
In the most recent period of time, the
national average number of days required to complete the foreclosure process
was 857; however, the duration of the process can vary greatly from state to
state.
Understanding
Foreclosure
The mortgage or deed of trust contract serves as the legal basis for the foreclosure process. This type of contract grants the lender the right to use a property as collateral in the event that the borrower fails to abide by the terms outlined in the mortgage document. The process of foreclosing on a home typically starts when the borrower defaults on at least one of their mortgage payments or misses at least one of them. However, the specifics of the procedure can vary from state to state. After that, the creditor will send a notice of missed payment, which will state that the payment for the previous month has not been received.
If the borrower is late with two payments,
the lender will send a demand letter to the borrower. This is a more serious
matter than a notice of a missed payment, but the lender may still be willing
to work out a plan for the borrower to make up for the missed payments.
After three months of missed payments, the
lender will send a notice of default to the borrower. When this happens, the
loan is turned over to the foreclosure department of the lender, and the
borrower typically has another thirty days to make up any missed payments and
get the loan back into good standing (this is called the reinstatement period).
If the homeowner has not made up for the missed payments by the time the
reinstatement period comes to an end, the lender will start the foreclosure
process.
A foreclosure will be reported on the
borrower's credit report within a month or two of the first missed payment, and
it will remain there for seven years from that date. After that, the borrower's
credit report will no longer include a record of the foreclosure.
The Procedure for Foreclosure Is Different in Each State
Each state has laws that govern
foreclosures, including the notices that a lender is required to post publicly,
the homeowner's options for bringing the loan current and avoiding foreclosure,
and the timeline and process for selling the property once it has been
foreclosed upon.
After a drawn-out period of
pre-foreclosure proceedings, the actual act of a lender seizing a property,
known as a foreclosure, is typically the final step. Before initiating the
foreclosure process, the lender may present the borrower with a number of
options that can help the borrower and the seller mitigate some of the adverse
effects that will be caused by the foreclosure.
Judicial foreclosure is the norm rather
than the exception in 22 states, including New York, Florida, and Illinois.
When this stage of the process has been reached, the lender must present
evidence to the court that the borrower is in default in order to obtain
permission to foreclose on the property. If the bank's request to foreclose on
the property is granted, either the local sheriff will hold an auction to try
to recoup the money that is owed to the bank, or the bank will become the owner
of the property and try to recoup its losses by selling the property in the
traditional manner.
The foreclosure process in the other 28
states, including Arizona, California, Georgia, and Texas, is predominately
handled through nonjudicial foreclosure, also known as power of sale. This method
of foreclosing on a property is typically much quicker than a judicial
foreclosure, and it does not involve the judicial system at all unless the
homeowner sues the lender.
How Long
Does Foreclosure Take?
According to the U.S. Foreclosure Market
Report compiled by ATTOM Data Solutions, a provider of property data, the
average amount of time spent in the foreclosure process for properties that
were foreclosed on during the second quarter of 2022 was 922 days. This
information was derived from the properties total number of days spent in the
process. This is up 34.5% from the previous quarter's average of 685 days,
which was 685 days. The average for the previous quarter was 930 days, so this
is a slight decrease from that.
The standard number of days varies from
state to state due to the various laws and procedures that govern the
foreclosure process. In the second quarter of 2021, the following states had
the longest average number of days for properties that had been foreclosed: Hawaii
(3,068 days), New York (1,822 days), and Indiana (both with 1,822 days) (1,617
days)
The following three states had the
shortest average times to foreclose during the same time period: Wyoming (173
days), Arkansas (253 days), and Tennessee (270 days)
The following graph illustrates, beginning
with the first quarter of 2007, the average number of days between mortgage
default and foreclosure filing.
Is There Any Way to Stop a Foreclosure?
It is possible for a borrower to avoid foreclosure even if they have skipped one or two payments on their mortgage. The following are some other options
Reinstatement
During the reinstatement period, the
borrower has the opportunity to get back on track with the mortgage by paying
back what they owe before a certain date. This includes any missed payments,
interest, and penalties that may have been incurred.
Short refinance
A short refinance is a type of refinancing in which the new loan amount is lower than the outstanding balance. The difference between the two amounts may be forgiven by the lender in order to assist the borrower in avoiding foreclosure. It is better to approach short refinance from lenders such rocket mortgage, mr cooper (Home Loan and Refinance) and freedom mortgage.
Special forbearance
If the borrower is experiencing a
temporary financial hardship, such as mounting medical bills or a drop in
income, the lender may be willing to reduce or suspend the borrower's payments
for a predetermined period of time.
The Consequences of Defaulting on a Mortgage
In the event that a property does not sell
during a foreclosure auction, or if it otherwise never went through one, then
the lender, which is typically a bank, will typically take ownership of the
property and might even add it to an accumulated portfolio of foreclosed
properties, also known as real estate owned (REO).
The websites of financial institutions
typically make it simple to search for and find properties that have been
repossessed. These kinds of properties can be appealing to real estate
investors because, in some instances, financial institutions sell them at a
price that is lower than their current market value. This, in turn, has a
negative impact on the lender.
A foreclosure will show up on the credit
report of the borrower within a month or two of the first missed payment, and
it will remain there for seven years from the date of the first missed payment.
When the foreclosure has been removed from the borrower's credit report after
seven years has passed.