When the economy collapsed in 2008, foreclosure became a fact of life for millions of Americans. About 250,000 new families enter into foreclosure every three months, according to the Federal Deposit Insurance Corporation.
Facing a foreclosure can be daunting prospect for people in trouble with their mortgages, especially when they are unsure of what to do. Across the country, six out of 10 homeowners questioned said they wished they understood their mortgage and its terms better.
The same percentage of homeowners also said they were unaware of what mortgage lenders can do to help them through their financial situation.
The first step to working through a possible foreclosure is to understand what a foreclosure means. When someone buys a property, they typically do not have enough money to pay for the purchase outright. So they take out a mortgage loan, which is a contract for purchase money that will be paid back over time.
A foreclosure consists of a lender trying to reclaim the title of a property that had been sold to someone using a loan. The borrower, usually the homeowner living in the house, is unable or unwilling to continue making mortgage payments. When this happens, the lender that provided the loan to the borrower will move to take back the property.
How do Foreclosures Work?
People enter into foreclosure for various reasons, but it typically follows a major change in their financial circumstances. A foreclosure can be the result of losing a job, medical problems that keep you from working, too many debts or a divorce.
Foreclosures often begin when the borrower stops making payments. When this happens, the loan becomes delinquent and the homeowner goes into default. The default status continues for about 90 days. During this time, the lender will get in touch with the borrower to see whether they will be able to pay the balance of the loan.
At this point, if the borrower cannot pay, the lender may file a Notice of Foreclosure, which begins the process. The lender will file foreclosure documents in a local court. This part of the process usually takes 120 days to nine months to complete. If borrowers need extra time, they can challenge the process in court.
How do Foreclosures Relate to Debt?
Some people facing foreclosure find themselves in this position because of mounting debt that made it harder to make their mortgage payments.
A foreclosure can add to your financial problems if your state allows a deficiency judgment, which means the borrower owes the difference between what is owed on the foreclosed property and the amount it eventually sells for at an auction.
Thirty-eight states allow financial institutions to pursue borrowers for this money.
In cases when a lender does not use a deficiency judgment, a foreclosure can relieve some of your financial burden. Although it is a loss when a lender takes the home you partially paid for, it can be a start to rebuild your finances.
It is a good idea to work with a financial adviser or a debt counselor to understand what kind of debt you may incur during a foreclosure.
What Else Should I Know?
If you are thinking about going into foreclosure, there are a number of things to consider:
- A foreclosure dramatically affects your credit score. Fair Isaac, the company that created FICO (credit) scores, drops credit scores from 85 points to 160 points after a foreclosure or short sale. The amount of the drop depends on other factors, such as previous credit score.
- Get in touch with your lender as soon as you are aware that you are having difficulty making payments. You may be able to avoid foreclosure by negotiating a new repayment plan or refinancing that works better for you.
- States have different rules on how foreclosures work. Understand your rights and get a sense of how long you can stay in your home once foreclosure proceedings begin.
- Look out for scammers hoping to profit from your misfortune. If you decide to work with a company to help you through your foreclosure, get everything in writing and understand the fees and contract involved.