Foreclosures unfortunately are a part of the home-buying cycle of life. My first home was a foreclosed home purchased from a bank. In 1994, foreclosures were up 17.7%, How can this happen? Is there anything that can stop this from happening? When is it too late to stop foreclosure from your lender?
We ended up purchasing a foreclosed home when we became interested in renting a home for our growing family. The realtor I contacted said, “If you can afford to rent, you can afford to buy”. Nevertheless, that was a loaded phrase because there is so much that goes into owning a home besides just the mortgage.
For us, it became a financial challenge that we successfully navigated and ultimately helped us to begin to build wealth. However, for many owning their first home can lead to financial hardship if it forces them to live check to check because they are now house poor. They become one paycheck away from becoming homeless because they are about to lose their home to foreclosure. Let’s unpack the reasons leading up to their financial troubles.
Too Much House
Truth be told, many people purchase more house than they can afford. Any home affordability calculator will tell you how much house you can afford. Click here for the Better.com calculator. However, there is a catch, what every calculator says you can afford does not consider all your other expenses. You must live so create a budget first with all your current expenses to determine what you can afford. Click here for a budget template. Finally, do some research on the cost to purchase per thebalancemoney.com and read the Hidden Costs of Owning a Home Blog. The hidden costs are the ones that can impact your ability to afford a home after you have made the purchase.
Too Much Debt
Our problem wasn’t that we purchased too much house; we had credit card debt and two children to support. The added expenses from a new home threw us into living above our means. I was not as dedicated to budgeting as I am now, so we had no idea that “if you can afford to rent you can afford to buy” was simply not true for us. However, we quickly realized that we needed to make more money and that is what we did. This was a hard-knock lesson for learning the art of Living Stingy.
An Unexpected Crisis
Sometimes things happen to us beyond our imagination. A sudden illness, a climate disaster, the loss of a job, an accident, or even the loss of a spouse. All these events can turn your finances upside down. Most of these unexpected disasters can be far beyond your fully funded emergency fund. One or more may not be helped by having health, life, or home insurance. You just need to understand what foreclosure means and the options available, then you can make the best decision for you and your family. Let’s review the foreclosure process and then all your options.
The Foreclosure Process
Foreclosures drastically increased throughout the nation in 2022. With a total of 248,170 initiated, U.S. foreclosures rose a staggering 169 percent from the previous year per SoFi.com. Foreclosure filings, which include scheduled auctions, default notices, and bank repossessions, also rose substantially in 2022.
The foreclosure process does not happen overnight. It may begin by making payments later than the first of the month. However, you do have up to in most cases, until the 15th of the month. Paying as late as the 15th of the month does not count as a missed payment because it is the bank’s grace period. However, if you are having financial issues this could eventually progress until you have missed a full month. Therefore, after 90 days the mortgage lender will typically issue a delinquency notice. This is the first step toward the foreclosure process.
At about the 4th month of missed payments, the bank will begin the foreclosure process by issuing you a formal notice of default. This is their formal notice of intent to start the foreclosure process. This notice will still give you a few more weeks to rectify the back payments. Therefore, the mortgage lender will make every effort to avoid losing money by giving you ample enough time to work this out prior to the foreclosure proceedings.
The Foreclosure Process By State
Each state handles foreclosures differently. The foreclosure proceedings can be judicial or nonjudicial.
Judicial foreclosure proceedings require the foreclosure party to file a lawsuit. The case will proceed through the court system to be processed. This legal process offers some advantages to lenders as they will obtain court approval to sell your home at a public auction.
The nonjudicial foreclosure procedure requires that the foreclosure party follow state-specific, out-of-court procedures for the foreclosure process. No need to go to court to foreclose.
These states require judicial proceedings: CT, DE, FL, HI, IL, IN, IA, KS, KY, LA, ME, NJ, NM, NY, ND, OH, OK, PA, SC, VT, WI
These states are nonjudicial: AL, AK, AZ, AR, CA, CO, DC, GA, ID, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NC, OR, RI, SD, TN, TX, UT, VA, WA, WV, WY
What Can You Do To Avoid Foreclosure
There are options to help you avoid foreclosure on your home.
You can pay off the past due amount that you owe including late fees by getting help from family and friends. Another option would be to contact your mortgage company to see if they have any options to help you get caught up. Your mortgage company may have loan modification programs to help you avoid foreclosure. This type of repayment plan was very popular during the pandemic when many homeowners experienced job loss. However, do not wait until the last minute to seek this type of help.
Another option to consider is selling the home. This will typically be a short sale where the property owner sells the home at a price that is less than the outstanding mortgage amount. Hence, because the homeowner is behind in the monthly payments this may be the only option. The mortgage company must approve the short sale first as all the proceeds from the sale belong to the lender. Therefore, this entire process could take up to a year due to the approval and paperwork involved. Hence, many buyers are hesitant to make this type of purchase. Especially when, there is a much better option with a better time frame.
Finally, filing for bankruptcy is an option. However, it may not be the best option as bankruptcy has many consequences. The biggest downside is a negative impact on your credit score lasting for seven years. Therefore, consult a bankruptcy lawyer for legal advice to understand the process and the legal fees involved.
Nevertheless, you have up until the last day of the sale at the foreclosure auction to stop the foreclosure. Once your lawyer has filed the papers in court declaring bankruptcy, an injunction called an automatic stay will stop the foreclosure.
When it is too late to stop the foreclosure proceedings
The good news is it is never too late to stop the foreclosure of your home. The redemption period where the homeowner has the option to pay off the entire mortgage including late fees. The best way to do this is to obtain a second mortgage to pay off the mortgage. Hence, this may be the best way to improve your financial situation but be mindful of the interest rate. You could end up back in the same situation if the interest rate substantially increases your mortgage payment. The next step would be to set up a budget and an emergency fund to improve your odds to avoid a foreclosure action in the future.
The Foreclosure sale
Once the lender has foreclosed on the property it goes on the market to be sold to the highest bidder. Many real estate investors pick up properties to flip during this period. Many of these houses at foreclosure sales sell for less than the amount of the outstanding mortgage debt. The difference between the outstanding mortgage amount and the sale price is called the deficiency. Some states let the foreclosing party claim these funds from the sale as a deficiency judgment.
Some states will allow the homeowner to buy back the home during the foreclosure auction. Check your states for the governing laws.
Foreclosure Steps And The Period Of Time It Takes
Step 1: Payment Default – 90 Days
Missing at least one mortgage payment. During the time between your first missed payment and the second one, the lender is willing to work out a plan to catch up with missed payments. After three missed payments the lender will issue a demand letter this is the pre-foreclosure notice.
Step 2: Notice of Default – 120 Days
After the fourth missed payment a public notice gives the borrower 30 days to submit the missed monthly mortgage payments before formally starting the foreclosure proceedings.
Step 3: Notice of Trustee’s Sale – 150 Days
Depending upon whether your state is a judicial or nonjudicial state will determine if papers just need to be filed at the court or if a formal hearing will need to be scheduled before the foreclosure. The court’s approval will lengthen the foreclosure process. Once all the paperwork is in order a notice of trustee’s sale or notice of sale will be recorded in the count with the location of the property. The date, time, and opening bid for the public auction will be established.
Step 4: Trustee’s Sale – 30 to 90 Days – Depends on State
The property is placed on the public auction and will be given to the highest bidder. The opening bid will consist of the outstanding loan amount, liens, unpaid property taxes, and any costs associated with the sale.
Step 5: Real Estate Owned – Immediately After Auction
If the property is not sold during the auction the property becomes the property of the bank. The property can now be sold through a real estate broker or with the assistance of a Real Estate Owned (REO) asset manager. The property is now known as “bank-owned”. Our first home was “banked-owned”, and we purchased the property using a real estate agent.
Step 6: Eviction – Up To 10 Days
Once the auction is over whether the property is sold or not, the homeowners are issued an eviction notice to vacate the property.
There are many reasons why a person may experience financial hardship causing a foreclosure on their home. However, there are options as noted above that can help you navigate the process. Knowing as much as you can before things get too far out of hand goes a long way to protecting your home and financial future.
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