If you are like many Americans and are having a tough time keeping up with your mortgage payments, it’s important that you understand the foreclosure process so you won’t lose your home.
- The first 30 days – these 30 days are called a grace period and your lender will do nothing. But you may be assessed a fee for having made that payment late
- 60 days late – this is where alarm bells go off in your lender’s offices. You will most likely receive a letter or telephone call reminding you that you’re late and need to bring your payments up to date.
- 90 days late – if you miss three months of payments, your lender will probably get serious and begin the foreclosure process using one of the two types of actions listed next. (Note: While all states permit judicial sales, only 29 permit power of sale foreclosures.)
- Judicial sale – this type of foreclosure must go through the courts
- Power of sale – can be done solely by the mortgage holder
In the event your mortgage holder chooses to do a judicial sale, it must first file suit with your court system. You’ll then receive a letter from the court demanding payments. You then typically have 30 days to respond with a payment if you want to avoid foreclosure. If you do not make the requisite payment, a judgment will be entered at the end of the time period for making payment. Your lender can then request that your house be sold at auction.
Power of sale
The way this foreclosure process works is that your lender will serve you with papers demanding that you pay. Several months after this, there will be a deed of trust drawn up that will convey your property to a trustee temporarily. The trustee will then sell your home for the lender at a public auction.
If your home is sold for less than what you owe on your mortgage, you will most likely be issued a deficiency judgment. This will require you to make up the difference. For example, if you owed $180,000 on your home and it sold for $165,000, you might be be issued a deficiency judgment for the $15,000, which you will ultimately be required to pay the lender.
The best thing you can do to keep your home from going into foreclosure is to communicate with your lender. It’s likely that your mortgage holder will be willing to work with you as a foreclosure is also bad for it. The odds are that your lender will work with you on a personal level, taking your circumstances into account. In fact, if you are only two or three payments behind, your lender will probably send you what’s called a “loan workout package” to help you catch up with your loan. It will consist of information, forms and instructions related to your ability to make payments.
In addition to communicating with your lender, you do have several other options.
FHA – if where you work or live is in an area that has been declared by the federal government to be a natural disaster area and you’re headed to foreclosure, the FHA (Federal Housing Administration) has relief plans that can help you. As an example of this, you should be able to get up to three month’s relief from your mortgage payments to give you time to work out your situation.
- Forbearance – this is where your mortgage holder agrees to let you suspend your payments for some period of time if you agree to another option for satisfying the amount of your loan.
- Reinstatement – where you pay the outstanding amount in one lump sum.
- Mortgage modification – these have become very popular recently due to the federal programs called HAMP (Home Affordable Modification Program) and HARP (Home Affordable Refinance Program). HARP can be especially helpful if you’ve kept up with your mortgage payments but are “underwater” on your mortgage. If you are employed but struggling to make your mortgage payments, the HAMP program might be able to lower your monthly payments. Here’s a brief video that explains how you could qualify for this program.
- Sell your home–the final and ultimate way to avoid foreclosure is to sell your home. You could then pay off your loan and move on. You might have to rent for a while or if you netted some money from the sale of the house you might be able to use it as a down payment on a smaller, less expensive house with a cheaper mortgage.
The effect on your credit score
If your house does go into foreclosure, this will definitely have a negative effect on your credit report and credit score. However, it will not damage it beyond repair. Your credit score is based on a number of different factors and foreclosure will be only one of them. If you had a relatively good credit score before your home went into foreclosure, you might have a surprisingly decent score afterwards. Of course, you should still go to work and do what you can to repair your score.