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Whether you’re a prospective homeowner or a current homeowner with a mortgage, you’ve likely learned that foreclosure is something you’d strongly prefer to avoid. Foreclosure is a legal process that allows a mortgage lender to seize properties from borrowers who have stopped making their mortgage payments or otherwise violate the terms of their loan.
Not only does foreclosure cause you to lose your home, but it can also be extremely detrimental to your credit and financial stability. Fortunately, however, if you learn about the types of foreclosure and what to do when facing foreclosure, you may be able to take steps to prevent it before it’s too late.
What Kind of Foreclosure Are You Facing?
Within the United States, there are a few types of foreclosure: judicial, nonjudicial and strict foreclosure. If you find yourself facing foreclosure, it’s important that you understand what type your lender may pursue. This way, you can become informed of the process, your rights and the actions you can take to help prevent it.
Judicial
All states allow judicial foreclosure, which occurs when a lender must file a civil lawsuit and take a borrower to court to handle the foreclosure. A lender must go this route to foreclose on a property if the mortgage agreement does not include a “power of sale,” which is a clause that permits a lender to sell a property without going to court if a buyer defaults, or fails to make payments, on their loan.
When a lender files a lawsuit to initiate the pre-foreclosure process, the borrower will receive a copy of a complaint or petition, which gives them the ability to respond within a certain period of time. If they don’t file their response or the court decides the foreclosure should take place, the court will typically set a date to sell the home through a public auction.
Nonjudicial
When a borrower defaults on a mortgage in states that allow a power of sale clause, lenders may work with a foreclosure trustee to sell a property without going to court. Known as nonjudicial foreclosure, this process typically takes less time than that of judicial foreclosure, and the steps lenders must take to complete it vary by state.
In some states, for example, a lender must send a borrower a notice of default prior to a notice of sale; in others, a borrower may only receive a notice of sale. As with judicial foreclosure, nonjudicial foreclosure most often results in the sale of a property through public auction.
Strict
Strict foreclosure is a type of judicial foreclosure that is currently only allowed in Connecticut and Vermont. As with the standard judicial foreclosure process, a lender must file a lawsuit with the court and notify the borrower that the suit has been filed, giving the borrower a chance to respond and pay their debt by a certain date.
If the borrower doesn’t respond and the court agrees the borrower has defaulted on their loan and approves the foreclosure, the court can give the property’s title directly to the lender without conducting a sale.
What’s Pre-Foreclosure?
Pre-foreclosure starts with the first step in the foreclosure process, when a lender files a lawsuit with the court and issues the borrower a notice of default or begins the nonjudicial foreclosure process. Most often, a lender won’t begin the pre-foreclosure process until a borrower has missed four months’ worth of loan payments, but the amount of lenience can be much shorter and vary from lender to lender.
Because pre-foreclosure often requires lenders to give borrowers a notice of default, borrowers can have a chance to prevent foreclosure by making up their late payments or selling the property. Additionally, the foreclosure process can be very costly to a lender, making it something they would often like to avoid as well.
For these reasons, anyone facing foreclosure should communicate with their lender as soon as possible to learn about their options, negotiate an alternative solution and potentially prevent foreclosure.
What Are Your Options for Stopping Foreclosure?
Fortunately, options and resources exist to help borrowers like you stop foreclosure before and sometimes even after they become unable to make their mortgage payments.
Seek Foreclosure Avoidance Counseling
The US Department of Housing and Urban Development (HUD) supports homeowners with foreclosure avoidance counseling through housing counseling agencies throughout the country. These services are free, and borrowers facing foreclosure can search for a HUD counselor in their area to receive assistance and potentially refinance or modify their loans to lower their monthly mortgage payments.
Contact Your Lender
We’ve already mentioned this, but we want to say it again for emphasis—because lenders would also typically like to avoid the costly and time-consuming foreclosure process, borrowers facing delinquent payments or foreclosure should contact their lender as soon as they think they may be unable to make a payment.
The sooner a borrower communicates with their lender about their situation, the more willing and able a lender may be to work with them. A lender may be open to helping a borrower refinance their loan, offer loan forbearance (a temporary suspension of loan payments) or alter the mortgage’s terms.
Ask for a Short Sale
A borrower may also be able to avoid foreclosure by asking their lender for a short sale, also known as a pre-foreclosure sale. This is the sale of a property for a price lower than the amount the borrower still owes on the mortgage, and all proceeds from the sale will go directly to the lender.
Then, the lender may either forgive the borrower any remaining difference or require them to pay the difference through what’s known as a deficiency judgement.
File for Bankruptcy
Finally, as perhaps a last-resort option for avoiding foreclosure, a borrower may file bankruptcy. When they do so, the court forces all the borrower’s creditors to stop foreclosure and any other kind of debt collection processes. This can potentially give a borrower several months of extra time to pay their debts, negotiate with their lender or form a repayment plan that could allow them to keep their home.
Bankruptcy is often the least desirable option to prevent foreclosure because it can be extremely damaging to a person’s credit and interest rates on future loans. In fact, bankruptcy can remain on a person’s credit report for up to 10 years. While filing for bankruptcy is not a decision to make lightly, it can potentially help a borrower prevent foreclosure and keep their home.
Watch Out for Foreclosure Rescue Scams
Often, people facing foreclosure are experiencing high levels of stress as well as feelings of instability and uncertainty. Sadly, there are scammers who have developed ways to take advantage of people’s vulnerability during this difficult time.
Known as foreclosure rescue scams, predatory individuals or companies may make false promises to help a borrower keep their home. Signs of scams include asking for payment up front, promising the ability to stop foreclosures or offering to act as a middleman between the borrower and mortgage lender.
The existence of these scams is yet another reason why it’s crucial for any borrower facing foreclosure to contact their lender directly right away.
How Would Foreclosure Affect Your Credit?
Foreclosure can be extremely detrimental to a person’s credit. The higher your score was before the foreclosure, the more your score will drop from it. It could lower a person’s credit score anywhere from 100+ points, foreclosure can make it more difficult for anyone who goes through it to obtain future loans, housing and employment.
This item stays on a person’s credit report for seven years, which can make it difficult to bounce back from.
What If You Can’t Avoid Foreclosure?
Ultimately, know that resources exist to help homeowners both before, during and after the foreclosure process. These include the Making Home Affordable program, mortgage forbearance and situational foreclosure moratoriums, and you can always negotiate with your lender.
However, if you’re unable to avoid foreclosure, it’s also important to know there are steps you can take to rebuild your credit and get your financial life back on track. No matter what happens, you can recover from foreclosure.
While you can’t remove an accurate foreclosure from your credit report, there are steps you can take to address any questionable negative items that are bringing down your score. Get in touch with our team at CreditRepair.com to learn about how credit repair can help you.
