Foreclosure procedures differ within states. In the western states, you have Notes supported by Deeds of Trust. While in the eastern states you have Mortgages. What’s the difference? In a trust deed, when you sign your closing documents at purchase you sign the right for a trustee, who holds the note and deed of trust for the lender, to foreclose on a property at will once it reaches foreclosure status. There is no court order needed since you signed and agreed to allow the powers of the trustee to be enacted in the case that you do fall way behind on payments and land in default. Mortgage holders are different. They don’t facilitate a third party to foreclose at will, and the foreclosure has to go through court proceedings. So, because of the court’s involvement, mortgage foreclosures can take longer than a deed of trust. Once you are unable to make your payments on time the process that the banks use is similar in both security instruments. The process usually goes like this:
When you miss a payment you will immediately start getting nasty notes from the lender telling you they are going to foreclose on the house, unless you come up with the payments and late charges immediately. This is nothing but a scare tactic, one of many that the bank uses to make you nervous and keep you up at night worrying about finding another place to live. I live in Nevada, and the trustee can not foreclose on a house until it is four months behind on payments. Other states allow the same amount of time or less. Some states are 90 days instead of 120. If you do get in financial trouble make sure to find out how many days your state allows before foreclosure proceedings can take place.
You are going to get bombarded with scary-looking mail and threatening phone calls. They won’t stop, and it will probably drive you nuts. If you are going through a financial rough patch and believe you are going to come out before you reach the end of the delinquency period, then the best thing for you to do is contact your lender to try and work something out. Many lenders have plans for people who have fallen temporarily on hard times, and quite often you can make a deal with them. There are times when you can’t. It all depends on the lender.
After 30 days of nonpayment, you will receive a Notice of Default. This should not be confused with a Notice to Foreclose. All it means is you are late on your payments and have defaulted on your agreement. The worst thing that happens after 30 days of nonpayment is the lender reports you to all of the three major credit bureaus, which will impact your credit score dramatically.
The best-case scenario is you have spoken with the bank, made a deal, and can come up with enough money to meet the terms of the agreement. Things go back to normal, and after some time your credit will heal itself.
The worst case is you and your wife have lost your jobs, and in the days of Covid, some people are unable to get another job fast enough to rebound. Now the clock starts ticking and your options have narrowed down. The good news is it’s only been 30 days. You still have some time. If you can go to a family member or a close friend and borrow enough money to catch up on your payment, swallow your pride and do it. The bank will moan and groan about the fees, but they can’t foreclose on you over fees. Don’t ever borrow money unless you have a way of paying it back. There is no sense in borrowing anything at all if you're stuck in the mud and can’t see yourself with enough income to pay back what you borrowed and continue to make your loan payments in the foreseeable future. Borrowing blindly is a sure way to lose a friend or alienate a family member.
After 90 or 120 days of non-payment, you will come home one day and find a paper taped to your door. That paper would be your Notice of Foreclosure. In the next couple of days, you will start getting certified letters containing the Notice to Foreclose. They don’t stop coming. You might get ten of them because the bank wants to make sure you were served notice to cover themselves down the line. Depending on the state that you live in you might have a little time to get your things in order, pack up and find a new place to live. You usually have a minimum of 30 days before the house is put up for auction, or sometimes much longer, especially in a Mortgage state. Again, every state has its own set of rules, so you’ll have to check when your home is going to be sold off.
Sorry that these are not happy thoughts and I hope it never happens to you. It’s daunting having to leave your home and go scrambling for a new place to live. But if it does you do have some cards to play before the lender tries to put your home up for auction. Here are some of them.
Loan Forbearance: If you can't cover your mortgage because of a temporary income loss try and convince the bank to do a forbearance on your mortgage. This has to be acted on early in the game. You will have to demonstrate to your lender how you are going to continue to make payments to get a forbearance. What is a forbearance: The bank takes your delinquency and moves it to the back end of the loan. So, say you owe $6500 for missed payments. The bankrolls the $6500 back into the loan, and if you have a 30-year loan you won’t really feel that much of a pinch on your monthly payment.
Loan Modification: You have experienced a loss of income but are still working and able to pay, but not as much as you were paying before. If your household income has dropped, but you still have a steady income source, your lender may offer a Loan Modification. A loan modification follows the same path as a forbearance. The difference is The lender takes a larger portion of what you owe on your loan and sets it aside into what is called a Ghost Loan. For example, the bank takes $120,000 off the loan and places it into the ghost loan instrument. Now instead of making a payment on $400,000, you are making a payment on $280,000. And if the bank is in a good mood they’ll give you a low-interest rate to boot, and your mortgage payment goes down to the point where you hopefully can afford it. Now, that Ghost Loan that was set aside to offset your mortgage payment remains there until the loan expires, and then it turns into a Balloon Payment which is due immediately. If you plan on staying in the house for a long period of time and you’re living in an area where you will experience equity, you won’t really have to worry about that $120,00 hanging out there. You can either refinance that amount and stay put, or sell and pay that money off and still be in the black. If you are only planning on living in your home for a short amount of time, a loan modification might not be the right thing for you, and it is probably better to seek other options
Selling your home: If things fail, act early, and try to convince the bank into allowing you to sell your home. This makes sense if you have equity in the property or are looking to avoid a foreclosure on your credit profile. The bank won’t give you a lot of time, and selling your house works best when you are in a seller's market. So, if you have to make any repairs or necessary improvements do them as quickly as you can, then go and find a top-selling real estate agent to move your property. In the meantime, save whatever you can for moving expenses, and security deposits on a new place to live.
Short Sale: You can do a short sale if property values have dropped dramatically, and you owe significantly more to your home than when you bought it. Depending on the nature of the market, the lender may allow you to sell your house below its actual value, making it easier for you to find a buyer. Again, the bank can come after you later for the difference between what the house sold for and the price you paid for it. Some states allow the banks to pursue you, others don’t.
Deed in lieu of foreclosure. You make a deal with the lender to hand the property over. Sometimes this will buy you time to get things in order and find a new place to live. This action is a sticky wicket because even after you turn the keys over, and eventually vacate the property, some banks will still come after you for the remaining balance on the loan, some won’t. You can also wind up with big tax debt because the IRS believes you have experienced capital gains by giving up the mortgage, and they will try and tax you on whatever amount you no longer owe. So, by using the Deed in lieu of foreclosure, you are exposing yourself to getting hit by both the lender and Uncle Sam. Be very careful when using this option.
Bankruptcy: This is probably one of your last shots should you choose to take it. Keep in mind that a bankruptcy can stay on your credit profile for up to 7 to 10 years. There are ways to improve your credit in the meantime, but bankruptcy is always there in the background for a lender to look at. But if your credit is shot anyway, and you need time before you can move, bankruptcy will stop a foreclosure in its tracks. Some states have a mediation program set up for people who have filed a chapter 7 or 13 and want to save their homes. The offerings available in the mediation will be similar to a forbearance or loan modification, that you might have been able to do upfront had you been proactive. So, I would advise again to keep communicating with the bank to avoid having to do something drastic, like filing bankruptcy. But if you file bankruptcy, and do absolutely nothing else, you will probably be able to stay in the house for no less than 3 to 4 months because of the protections that bankruptcy allows you. You can do it more than once, twice, maybe three times. It’s called abusing the system, but it’s not illegal. I wouldn’t advise it. The last thing you want is a long string of bankruptcy files coming up on your profile. Your credit rating will be in the toilet for a long time, and it will be very difficult to get a consumer loan at an interest rate that makes sense. So if you want to avoid riding around in a Ford Pinto for seven years, watch what you do when using the bankruptcy card.
Summation: If you are unable to make payments on your home let the bank know you are experiencing hardship. The worst thing you can do is to stick your head in the sand and ignore them. If you have some money the lender may allow you to just pay the principal on the loan, and waive the interest and impound fees for a few months until you get back on your feet. If not the other methods I have mentioned in the blog to try and save your home. Most importantly of all, don’t allow yourself to fall victim to the circumstances. If you lost your job and can’t pay don’t beat yourself up. Eventually, you’ll find another job. If you can no longer afford your home and have to move out, remember, there is always another home. Since the crash in 2008, there are several, forgiveness and second-chance programs available for people who have lost their homes and in the past and are now ready to buy again once they have gotten back up on their financial feet. It might take a couple of years to qualify for these programs, but time moves swiftly. Most importantly, try your best to mitigate the least amount of damage to your credit profile should you fall on hard times. If you go broke, still act in good faith not only with your lender but with all the people and places you owe money to. It will pay off in the long run.
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