Foreclosure is a set of legal actions a lender takes against a borrower that’s failed to meet their loan obligations. Such steps start the sale of property used as collateral when securing the loan. The proceeds received from such a sale allow lenders to recoup the unpaid debt.
Doesn’t it sound like a simple process? It’s simple for professionals who deal with foreclosures every day. However, not everyone understands the steps involved. For one, every state has its own set of rules. These steps also vary with the terms of the loan agreement or if it’s a residential or commercial property.
Compliance with foreclosure procedures may affect the cost and outcome. So, it’s crucial to understand how the foreclosure process works.
We’ll take a deep plunge into the foreclosure process with a step-by-step break down of the process.
Default by Borrower
When the borrower fails to meet their loan obligations, the lender can start foreclosure. The borrower defaults on the loan by failing to make timely payments. They can also default by failing to meet other obligations made when filing the loan. Examples of such duties include making payments on property insurance.
In such cases, the borrower will receive a missed payment notice from the lender. Mortgage payments are typically due on the first of the month. However, most lenders allow a 15-day grace period. The borrower is also liable to pay late fees after receiving a late payment notice.
When a borrower misses two payments, a lender can send a demand letter. A missed payment notice is more severe than a demand letter is. But, the lender may still be willing to work with the borrower to allow them to catch up on payments. Usually, the borrower has 30 days to remit the late payment fees before they receive the letter.
Notice of Default
The borrower receives a notice of default (NOD) 90 days after missed payments. The NOD describes how the borrower defaulted on the loan as well as the timelines for clearing the loan. Let’s say the default was due to failure to make regular and timely payments. Here, the NOD will state the owed dues and when they must be paid.
Some states allow lenders to display NODs on the home or commercial property. At this point, the lender may hand the loan to their local county foreclosure department where the property is located. This notice goes on the public record, and the borrower is informed.
In some cases, on commercial property, the lender may demand all the rent from the property. The only exemption being funds used in maintaining the property. These rules also depend on the terms of the loan agreement.
At this point, the borrower has another 90 days to settle the dues, thereby reinstating the loan. This grace period is also known as the reinstatement period.
A workout isn’t part of the foreclosure process but a way to avoid unnecessary costs, time delays, and other negative consequences of foreclosures. After the notice of default, both parties may try to work out a way to avoid more defaults on payments. Thus, restructuring the terms of the loan agreement.
Some conventional workouts include:
A repayment plan allows a borrower to send regular payments as well as an extra amount each month. Depending on the lender’s guideline, the plan may range from 3 to 24 months.
Here, the lender may agree to suspend or reduce the payment period. In exchange, the borrower agrees to start making full payments once the forbearance period elapses plus an extra amount for the missed payments.
Forbearance is common when the borrower has military service or gets laid off briefly. Under such circumstances, the borrower isn’t currently able to make payments but is likely to catch up in due time.
The lender also agrees to allow the lender to miss or reduce payments within a specified timeframe. It’s worth noting that both forbearance and repayment plans need extra repayments down the line.
Loan modifications allow a lender to bring the loan to current. Such plans also lower the monthly amount paid over the long term. If you can’t afford to pay your loan now or soon, a loan modification is the best option in preventing foreclosure.
In loan modifications, the overdue amount and more fee finance the current loan balance. This modification creates a new balance and terms for the loan. In most cases, a loan modification may reduce a lender’s monthly payments.
All states allow you to redeem the mortgage or pay off the loan before the property is up for sale. In some states, you can get a period after the final sale date to redeem the mortgage. This “amnesty” is contingent on you paying the loan off in full plus interest and other costs. A borrower can also reimburse the buyer of the property during the foreclosure sale.
Deed in Lieu of Foreclosure
Here, the lender transfers the title deed to the owner where the lender cancels the mortgage loan in exchange. Deed in lieu of foreclosure was more popular back when foreclosures attracted positive equity. The lender could sell the property, keeping all the profits.
These days, there aren’t many lenders who accept deeds in lieu. However, this measure reduces the cost and time that repossession takes. It also protects the lender if a borrower files for bankruptcy. So, some lenders might have an interest in such a solution.
A short sale may be an appropriate solution if the borrower owes an amount that’s greater than the worth of the property. In a short sale, the borrower puts the property up for sale and transfers all the proceeds to the lender. The lender accepts an amount lower than the owed amount. Choosing to forgive the remaining balance.
If the borrower is unable to cure the default by the period stated by the notice. The lender may demand an acceleration of the loan. Once a lender makes an acceleration demand, the amount due is not the missed payment. But, the entire unpaid debt. Most loan agreements contain terms that require the lender to send a breach letter.
This notice serves the lender as a warning. It also indicates that the loan was in default before foreclosure or a loan acceleration. In some cases, the loan contract may state that a borrower can automatically trigger a loan acceleration. If they skip some of the loan payments.
This letter specifies the default and the actions needed to cure it. The terms may include a date of not less than 30 days. By which the borrower must pay the owed amount. Other Terms include the consequences of failure to cure the default by the stipulated time. Generally, a lender may send this notice once the borrower is 90 days negligent on paying the loan.
These timeframes exist since, under federal law, a foreclosure can only start when the borrower is 120 days delinquent on loan payments. If the borrower fails to pay, then foreclosure proceedings can begin.
Lender Files Complaint/Trustee Issues Notice of Default
The next step of foreclosure depends on whether you are in a judicial or a non-judicial foreclosure state. Let’s have a look at how it plays out in either scenario.
A lender can take a judicial foreclosure action when they can’t negotiate a workout. The lender can also make such a move in cases where the borrower is unresponsive to demand notices and acceleration letters. The lender can start such a lawsuit by:
1. Petitioning the court for a foreclosure or by filing a complaint.
2. Issuing summons to the borrower and associated parties. This notice informs them when the suit will start and the timelines for contesting it.
3. Entering the suit into the county records as a lis pendens. This serves to give notice of the foreclosure to the public. As well as other lien holders and potential buyers.
The lender files such a suit in the county that the foreclosed property is located. They usually request the court for a judgment on the foreclosure and a sale order for the property. In some cases, you can also get a beneficiary judgment.
The complaint contains the name of the borrower and associated parties. Such parties include guarantors of the loan and second mortgage holders. The IRS can also be a party to these proceedings. Federal laws allow them the right to use properties to recoup payment of taxes. These laws are indicated clearly on loan documents as well as credit clearance forms. Under state law, the lender must notify every defendant (borrower) separately through court summons.
The complaint contains the argument that entitles the lender to seek relief. Such grievances also include all the loan documents and the amount due and default. It even species every aspect of the property.
In some states, the lender has to file an affidavit. Such an affidavit contains all the associated costs of the loan and suit. These grievances may also include associated legal fees. Every party with personal knowledge of the affidavit’s contents has to sign it. Automated signatures are not allowed.
Depending on the state, the complaint may also contain an order requiring all rent for commercial properties to be deposited at a court. Such a measure s prevents the borrower from using the rent to secure more loans during the foreclosure proceedings. During this time, the court can use the rent in the maintenance of the property. The court can even use it to make payments on the loan.
Non- Judicial Foreclosure
A third party or trustee handles non-judicial foreclosures instead of a court. The deed of trust names a trustee of the property. Such a third party is neutral and has a fiduciary responsibility to both the borrower and the lender.
The loan documents and deed of trust detail the procedures to all parties are to follow. Such systems ensure the borrower gets the minimum protection entitled under state law. Non-judicial foreclosures start when the lender notifies the trustee of the default and how the borrower can cure it. The next step is for the trustee to issue a notice of default.
The steps the trustee takes are:
– Sending notice of the proceedings to all associated parties. Such information includes a date for the foreclosure and sale.
– Putting the notice default into the county records.
– Putting postings of the notice on the property, publishing it in newspapers. State law or the deed of trust are clear on how to proceed with this step.
Like with summons, such notices tell the borrower the basis of the lender’s complaint. It also specifies the date the borrower can bring the loan payments current or contest the foreclosure. This notice also highlights the remedies the lender is seeking. These remedies may include the summary sale of the property or a money judgment.
The Bottom Line
There are many grace periods within the foreclosure process when borrowers can make payments. But, some attempt to make arguments to avoid foreclosure. Keeping up with one loan payment is possible. However, it becomes harder when you have to make multiple payments. Late fees may also make the situation harder.
As you can see, the concept behind a foreclosure is quite straightforward. Yet, the path to follow can end up being complicated and confusing. Foreclosure rules are usually detailed under every state’s real estate laws. If you work with an experienced real estate lawyer, then the path may be more transparent.
As a borrower, one of the best ways of avoiding foreclosure is maintaining communication with your lender. Especially if or when your financial situation changes. But, if foreclosure is unavoidable, you know what to expect from reading this article.
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