Homeownership is a big responsibility, especially if it involves taking out a loan. Most Americans cannot afford the purchase price of a house with cash, so they borrow money from a lender and agree to pay the principal and interest rate over time.
Mortgage loans can be structured in various ways, such as adjustable-rate mortgages and fixed-rate mortgages, but all borrowers are obligated to make mortgage payments on time.
If you own a home or plan to buy one soon, it is essential to understand foreclosure. This process can occur if you fail to keep up with monthly premiums or other obligations related to owning a property, such as not paying property taxes. You should also know the difference between preforeclosure and foreclosure.
Understanding Mortgage Delinquency
When you take out a loan to buy a house, you enter into a contract with the mortgage lender. They give you the funding necessary to purchase the home upfront so you can move in and own the property. In return, you agree to pay back the outstanding loan balance plus interest based on the structure of the mortgage terms.
As the homeowner, you are obligated to make these payments on time to maintain ownership of the property. Essentially, you only have the house because of the lender’s gift, so you are legally obligated to make monthly payments until you sell the home or pay back the entire loan balance.
Mortgage delinquency occurs when you fail to make an on-time payment. The longer you wait to pay back the owed amount, the greater the risk of losing your home.
What Happens When You Miss Monthly Mortgage Payments
Missed payments can become a significant problem very quickly. Even if you are facing financial difficulties, you are still responsible for meeting the lender’s requirements. When you fail to make a mortgage payment on time and in the full amount, you will likely have to pay a late fee when you do make the payment.
The longer you wait to pay the owed amount, the more penalties may be enforced, costing you even more money. Since a mortgage loan represents debt, a late payment will also affect your credit history, lowering your score.
If you miss several mortgage payments in a row or within a specified timeframe under your loan agreement, you could be in danger of losing your house entirely. Lenders have the right to initiate a process called foreclosure if homeowners are unable to meet the requirements of paying mortgage premiums every month.
The foreclosure process can be broken down into two main phases: the pre-foreclosure stage and the foreclosure of the home.
Pre-Foreclosure: The Early Stages
When you miss a mortgage payment, it doesn’t mean you lose your home immediately. There is a process laid out in your contract with the lender that determines how foreclosure can be initiated and the conditions of that practice.
The first stage of a foreclosure is the pre-foreclosure period. This process occurs after the homeowner has missed multiple payments and has been notified by the mortgage lender that their mortgage is delinquent. However, the official foreclosure proceedings have yet to be initiated.
If the homeowner meets the lender’s conditions on time, such as making up payments and addressing all late fees or penalties, they will be able to keep their home.
Notices and Warnings
Pre-foreclosure begins the moment a borrower defaults on their payments. Although most pre-foreclosures are initiated due to missed mortgage payments, homeowners could also lose their homes if they fail to pay property taxes to the government. A written notice of default and warnings will be the first signs that you have entered the pre-foreclosure process.
A late payment notice will be sent to notify you that you have yet to make a scheduled payment in the full amount. Another letter you may receive is called a breach letter or a breach of mortgage notice. This warning details the type of default that occurred, what is required to address the default, and what may happen if you fail to address it.
If the preforeclosure process ends with the homeowner not curing the default, the lender will file a notice of default with the court to initiate the official foreclosure of the home.
Options for Homeowners in Preforeclosure
Homeowners facing foreclosure have multiple options to rectify the situation and appease lenders. Once the lender files foreclosure documents, it may be too late to save your home. Here are some potential solutions you can pursue to maintain ownership rights.
Reinstatement
The simplest solution is to reinstate the mortgage by paying what you owe to the lender. This amount includes the missed payments and any penalties or fees associated with the default. If you pay these amounts before the deadline outlined in the breach of mortgage notice, the lender should reinstate your loan.
However, if you miss any other payments in the future, the lender may initiate preforeclosure proceedings much sooner.
Loan Modification
Homeowners facing foreclosure can negotiate with their lenders for loan modifications. This avenue is a potential solution if they are facing financial hardship and need help making payments consistently or anticipate being unable to pay the mortgage on time due to late fees or penalties.
If your lender is willing, you could ask for various loan modification strategies. A lower interest rate, extended loan term, or extended repayment period could help you manage your finances so that you can maintain the mortgage and keep your house.
Forbearance
A more complex solution to the issue is called forbearance. With this process, you request a temporary postponement of mortgage payments as you work out a repayment plan with the lender.
However, this solution can be challenging to pursue since lenders absorb the additional risk of unpaid mortgage premiums. This concern affects their bottom line in the short term, which could be enough to make them hesitate to suspend your payments.
Short Sale
The primary reasons to avoid foreclosure are to keep the home or recoup the money you have put into the property from past mortgage payments. If you are okay with losing the house, you could negotiate a short sale with the lender.
In this agreement, you sell your house for less than the remaining mortgage balance, which will be far below its fair market value. Although you won’t make any money from the sale, you will get a clean break from the property and won’t have the stain of a foreclosure on your credit score or financial record. Plus, you can avoid other more drastic solutions like bankruptcy.
Deed in Lieu of Foreclosure
Another option for avoiding foreclosure involves giving up ownership of your home: a deed in lieu of foreclosure. This process requires transferring ownership of the property to the lender.
A deed in lieu of foreclosure is far less damaging to your financial future. Your credit score won’t take as big of a hit, and the lender will accrue fewer upfront costs, which could make it more appealing to the firm. Lenders are not required to accept deeds in lieu of foreclosures from defaulting borrowers, so this solution may not work for everyone.
Foreclosure: The Legal Process
A pre-foreclosure home has a certain amount of time to work out a solution with the lender. Whether that solution involves reinstating the loan, creating a repayment plan, committing to a short sale, or considering a deed in lieu of foreclosure, there is a deadline for the homeowner to meet.
If they cannot find a viable solution by the lender’s deadline, foreclosure proceedings can begin.
The foreclosure process is a legal action the lender can take to acquire possession of the property after the homeowner defaults on their payments. Foreclosure proceedings can be lengthy, complex, and frustrating for everyone involved.
As the homeowner, it will damage your credit history and can be a very public event. The lender will be forced to pay multiple fees to complete the foreclosure and take possession of the home, after which they typically sell it. This course of action is why avoiding foreclosure by any means necessary is your best option.
Types of Foreclosure
Foreclosure may look different depending on how your lender pursues the process and what state you live in. The two primary types of foreclosure are judicial and non-judicial.
In a judicial foreclosure, the lender files a lawsuit against the defaulting borrower in court. This leads to court proceedings that determine the outcome, which is typically a public auction. In a foreclosure auction, the lender tends to make the opening bid, but the home is sold to the highest bidder for the best price.
Non-judicial foreclosures occur outside of court. One example is a power of sale foreclosure, which allows the lender to sell the property without going through the courts. The lender keeps all proceeds from the sale to cover its mortgage losses, though any money left over can go to the former homeowner.
The Foreclosure Timeline
The full process, including pre-foreclosure and the final sale of the home, can take months. In some states, there are longer pre-foreclosure periods, so the whole journey can drag on for half a year or more.
Typically, a borrower has 30 days to make up for a late payment. Then, the pre-foreclosure process could last for a few months. Eventually, when foreclosure is initiated, it could be several months before the entire proceedings are completed, especially if the courts are involved.
Your timeline will vary depending on the circumstances of your mortgage, the lender’s actions, and your state.
Consequences of Foreclosure
The foreclosure process forces homeowners to pay a high price. The emotional and financial effects can make life difficult for months or years to come. Many who experience foreclosure feel shame or embarrassment, especially if their foreclosure was public knowledge.
Loss of Home and Equity
Financially, you lose all the progress you have made building equity in the property. You have likely poured thousands or tens of thousands of dollars into the home, but if you go through foreclosure, you are unlikely to see even a cent of that investment. Plus, you lose a place to live and must seek other accommodations on top of the financial difficulties.
Damage to Credit Score
Foreclosure will also hit your credit score very hard. It could show up on your credit report for many years, making it harder to take out additional loans or mortgages.
Avoiding Foreclosure with a Cash Home Buyer
There is one other solution you can pursue to avoid the foreclosure process: selling the house to a cash buyer. A cash home buyer offers a fast, straightforward solution for homeowners facing foreclosure.
At A-List Properties, we can initiate a fast closing process in 14 days or less once you accept our offer, allowing you to beat any impending deadlines from your lender. You can also skip the repairs, house showings, and cleanup chores because we take houses in any condition.
By selling to A-List Properties, you can save your credit score from a devastating hit from foreclosure.
Call us today at 972-526-7052 or complete the online form to request a cash offer for your property.
Zach Shelley
Zach Shelley is a seasoned real estate investor with a diverse network spanning across the nation. As the founder of his own real estate venture, Zach is committed to offering innovative solutions to homeowners facing various real estate challenges.. Through his dedication and strategic approach, Zach continues to make a significant impact in the real estate industry, providing homeowners with alternative pathways to navigate their property transactions.
