You made smart decisions on the path to realizing your dream of
homeownership. You prioritized your spending and saved enough money for a
small down payment. Your
mortgage
broker was creative, accommodating and worked out a loan that fit your
budget. You signed the closing papers, got the keys, moved in and
settled into what you hoped would be a long stay in your home. Then the
unthinkable happened. You
got laid off from your job. Or maybe you or a family member had an accident that strained your finances. If you're in the
National Guard,
you may have gotten called into active duty, forcing you to close your
business temporarily. Or perhaps your variable rate loan increased your
monthly payments and your home didn't appreciate enough to refinance.
All of these scenarios play out every day in real life, and the sad
result can be foreclosure.
If you suddenly find that you can't
afford to pay your monthly loan payment, your lender has the legal right
to repossess your home and resell it to recoup the cost of the loan.
Foreclosure is a legal course of action in which nobody really comes out
on top. It's a stressful and unfortunate situation for the homeowner
and lender alike. Many people remain in denial about their finances,
making the situation worse. As unfortunate as the foreclosure process
may be, there are things you can do to save your home if you're faced
with it.
As the
real estate bubble in the
United States has begun to burst, the foreclosure rate has soared. The housing boom saw unparalleled growth from 2001 to 2005.
Adjustable rate mortgages (ARMs) and
subprime loans
made buying a house possible for many people who never thought they had
the money or credit to do so. ARMs have low initial rates that
typically go much higher after the first year or two. Subprime loans
allow people with poor credit to secure financing at high rates.
Mortgage brokers used both of these methods to get loans secured, and
many of the borrowers soon found out they couldn't afford their monthly
payments.
Here are some startling foreclosure statistics in the United States, according to
CNN Money:
- Nearly 1.3 million homes were foreclosed on in 2006.
- Colorado had the highest rate of foreclosure -- one out of every 376 houses.
- The total number of filings is up 43 percent from 2005.
- Real estate experts predict even more foreclosures in 2007.
Additionally,
a recent poll shows that more than six in 10 homeowners wish they
better understood the terms of their loan, and 60 percent of borrowers
in mortgage trouble aren't aware of services that can help them avoid
foreclosure [source:
FDIC].
The Foreclosure Process
The foreclosure process differs by state, but we can take a look at
the general steps that are taken. If you're faced with foreclosure, it's
important that you research your state's laws and practices.
Foreclosure proceedings can begin after a single missed payment, but it isn't very likely. Most
banks
and lenders have a grace period for late payments, usually with a fee
added on. It typically takes being a full 30 days late for the alarm
bells to go off. After the second missed payment, you'll be getting some
phone calls. Many
lenders will only accept both late payments to bring the loan current. They also may refuse any partial payments.
Once
you fall three months behind, things get serious. This is typically
when most lenders will begin the foreclosure process in one of two ways:
judicial sale, which requires that the process go through the court system, or
power of sale, which can be carried out entirely by the mortgage holder.
All
states allow judicial sale, while only 29 allow power of sale. If your
state allows power of sale, the loan papers will usually have a clause
that says this method will be used. Power of sale is typically faster
than the judicial route. Let's look at both methods.
Judicial sale:
- The mortgage lender will file suit with the court system.
- You'll receive a letter from the court demanding payment.
- Typically, you'll have 30 days to respond with payment to avoid foreclosure.
- At the end of the payment period, a judgment will be entered and the lender can request sale of the property by auction.
- The auction is carried out by the sheriff's office, usually several months after the judgment.
- Once
the property is sold, you're served with an eviction notice by the
sheriff's office, and you must vacate your former home immediately.
Power of sale:
- The mortgage lender will serve you with papers demanding payment.
- After an established waiting period, a deed of trust is drawn up that temporarily conveys the property to a trustee.
- The trustee will sell the house at public auction for the lender.
- Many times, these foreclosures are subject to judicial review to make sure everything was carried out legally.
- There is usually a requirement for the lender to post a public notice of sale for the auction.
Both
types of foreclosure require that any other involved parties be
notified of the proceedings. For instance, if the homeowner took out
another loan against the house with a third party, that lender must be
contacted and its loan amount must be paid from the auction's proceeds.
If the third-party lender isn't paid, it can apply the mortgage to the
new property owner. Many times, the lender will actually buy the
property back and attempt to sell it through the real estate market at a
later date.
There can also be
deficiency judgments
made against the borrower if the sale of the property doesn't satisfy
the amount of the loan. The entire difference between the two can be
required, although some states only require that difference between the
fair value of the property and the loan amount be paid.
There's one more type of foreclosure that's almost completely obsolete, called
strict foreclosure. In these cases, once judgment is made on the
lawsuit, the property is automatically assumed by the mortgage holder. Only
Connecticut and
Vermont still allow this practice [source:
Realty Trac].
Effects of Foreclosure
The most obvious effect of foreclosure is that you now find yourself
without a home. Many people rely on family at this point to get them
through the coming months. Some people are able to afford to move into
an apartment while they get their finances back on track. Sadly, some
people that suffer foreclosure find themselves homeless. Most states
have homeless prevention programs that assist people who are down on
their luck and in need of a boost. If you've been foreclosed on and have
no housing options, check with your state and local department of human
services to see if they can assist you.
Your
credit rating
is another way foreclosure can affect you. While being foreclosed on
does have a negative impact on your credit rating, it doesn't damage it
beyond repair. Credit ratings are based on your credit history, so the
foreclosure will be factored in along with everything else. If you had a
good rating before you fell behind on your loan, you might be surprised
at how high your
credit score is after you foreclose.
The
most important thing to do after foreclosure is to try and repair your
credit. Make sure all your other accounts are current and paid up. You
may try and secure a smaller loan -- making payments on this loan will
help you repair your credit. You may even be able to secure another home
mortgage at a less-than-prime rate with a large down payment.
If
you've been foreclosed on, you may have trouble finding or keeping
employment. Some employers require a good credit rating to get hired,
and foreclosure can even be grounds for
termination.
Stress and
depression
are also common effects of foreclosure. A lack of self-esteem and
self-worth are typically associated with people that have lost their
homes.
The trickle down effect of foreclosure can also have a
serious impact on your community. One foreclosure can ring up as much as
$34,000 in local government agency bills. Trash removal, unpaid
utilities, sheriff and police costs, inspections and potentially even
demolition of the property all contribute to that cost. Property values
also decrease near foreclosed properties. In some housing markets, up to
$220,000 in reduced property value can be expected [source:
Apgar, Duda, Gorey].
You can learn more about foreclosure and the housing market by looking into the links on the next page.
