Foreclosure is a legal proceeding in which a lien holder (Lender) obtains a court order to take over ownership of your home. While the process is complex and timelines vary depending on your specific locality, foreclosure should always be your last option. While a foreclosure can have a devastating effect on your credit report for 7-10 years, along with many other challenging issues, a deed in lieu of foreclosure can be highly beneficial to a home owner knowledgeable enough to take advantage of this alternative to foreclosure.
In other terms, Foreclosure is a legal proceeding in which your mortgagee, or other lien holder, obtains a court order to take possession of your home. Once the process is complete, the lender will often sell the property and keep the proceeds to pay off the remaining mortgage and any legal costs. In general there are many stages to the foreclosure process all of which begin during the pre-lien phase once a borrower is 30 days, or longer, late with their payment. Once a borrower is 30 days late on a payment lenders will take action usually by writing a payment demand letter to try and threaten a borrower into reinstatement by paying the amount owed plus penalties in full. If attempts in collecting the amount owed are unsuccessful, and the borrower does not delay the process by working with the lender to attempt a (Short Sale, Loan Modification, Deed-In-Lieu etc.) the bank will file a NOD (notice of default) with the county recorder’s office. These NOD’s are public record and recently filed NOD’s can be viewed at the county court house. After the NOD has been filed a lender will initiate a Notice of Sale complying with each states laws. The notice of sale will spell out the details of the Trustee sale, which is the court steps auction in which the lender will attempt to sell the property. If the lender is unsuccessful in selling the property on the court steps, the property will become banked owned and held on the lenders books until it is listed or otherwise disposed of.
Why would anyone want to allow their home go into foreclosure?
Foreclosure should always be a last resort option; as your home will ultimately be sold through foreclosure despite your best efforts at attempting other loan workout solutions. Therefore, even if you are unsuccessful in attempting a loan modification, refinance or short sale the property will ultimately be foreclosed on anyways. In this case even attempting to save your home may buy you extra time by allowing you to stay in your home a few extra months payment free. The process of foreclosure can be very difficult, embarrassing, and stressful. Furthermore, foreclosure will have the longest and most devastating effect on your credit. Even after a foreclosure occurs, you may still owe your lender money which they may aggressively try and collect through the use of debt collection agencies. In many cases the only reason home owners allow their homes go into foreclosure is that they don’t know all of their available options or they want to live payment free until they are legally forced out. This is becoming an increasingly common phenomenon as peopled faced with foreclosure will pull out all stops to delay the process, realizing that while foreclosure is eminent, living 12-18 months payment free may allow them the opportunity to get back on their feet prior to losing title their home and being forced out through the eviction process. After foreclosure occurs banks may also offer Cash For Keys (CFC) which is essentially a check for anywhere from 1,500-8,000 to convince you to leave the property and its current condition.
What happens after Foreclosure?
After the trustee sale occurs and the lender takes back legal title to the property a seller in theory looses their previously held property rights. While states have differing laws as to reinstatement rules, and the amount of time a borrower may purchase back a property after auction varies depending on the jurisdiction of the property. Generally speaking a lender will move forward to vacate the property. Whether there are the actual home owners themselves or bystander tenants living in the property, a lender will try every attempt to get them to leave. However, if a home owner or tenant is uncooperative in leaving, there are humane reasons requiring a specific eviction process to be handled. Each state and municipality provide general laws for how the post-foreclosure eviction should be handled, and in some cases the process can take 6+ months if a tenant/home owner is uncooperative. After foreclosure occurs banks may also offer Cash For Keys (CFC) which is essentially a check for anywhere from 1,500-8,000 to convince you to leave the property and its current condition.
What is Cash for Keys?
A cash for keys negotiation is an offer in which a lender may make to a homeowner, tenant or other party staying at the property to try and entice the residing party with a cash payment (Money Order/Check) in exchange for vacating the property and leaving it in “As-Is” condition. The process usually begins when a representative of the lender visits the property and realizes that people are still living inside after foreclosure and possession has occurred. The representative is usually a real estate agent or asset manager trying to sell the foreclosed asset (REO) for the bank. Generally they would earn a commission on the sales price, and have an incentive to make a positive impression on the lender. In many cases the representative may try and get potential previous owners or tenants to move out by making verbal threats or writing letters. However, once it is clear that cooperation is difficult they will make notes in their system to alert the lender of the potential issue. Each lender has different guidelines based upon how much they will offer, and whether they will negotiate higher payments. Many have customary practices they follow depending on the area in which a specific property may be located in. However, once an amount is determined a date will typically be set a few weeks (2-6) later in which the keys must be returned and the property must be delivered in “As-Is” condition in order to receive payment for cooperation. The Tenant must then move out and deliver possession of the property in return for being handed a check. From the perspective of the lender the main advantage of offering cash for keys is that it gets people out of the house quickly. Equally important is that the house is often left in better condition than it would be in the event that a long and drawn out eviction process is required. Nevertheless, it is imperative that potential “cash For keys” recipients be aware that a an offer is a last resort since once the final paperwork is signed and the payment is made, there will typically be little recourse.
What affect will a foreclosure have on my credit score?
Foreclosure will have the longest and most devastating effect on your credit compared to your alternative options and is one of the most credit-damaging events that can ever appear in your credit history outside of bankruptcy. A foreclosure may stay on your credit report for 7-10 years, and is some cases can be obtained through court records for up to 20 years. Not only will you be required to pay much higher interest rates on all debts, but you may also experience challenges in renting a home or even obtaining a good job. While a foreclosure will not stay on your credit report forever, it will make it extremely difficult to repair your credit. After seven years you may be able to remove a foreclosure by taking the appropriate steps required with the three major credit bureaus. This is why it is important to exhaust all available options before allowing your house to be foreclosed upon. Occasionally people who are very proactive in repairing their credit can use specific strategies explained later in the “Credit Repair” section to improve their credit and mitigate the harmful effects of foreclosure.
What are the tax consequences from foreclosure?
The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to avoid claiming a deficiency judgment as income from the discharge of debt on their principal residence. If you do not meet the guidelines established by the 2007 act, foreclosure will result in a taxable event. You would be required to claim the difference between the loan amount and what the home was sold for at foreclosure as income. All tax situations are highly specific and you should always seek the advice of a professional.
Deed of Trust versus Mortgage States
Every state has specific laws which specify how the foreclosure process operates. The primary distinction is whether your state uses a deed of trust or a mortgage to secure real estate.
While in common practice there is typically not a difference between the two, as they are both used to secure a lender’s interest in a property, when it comes to the foreclosure process there are some essential differences.
Most states use either a deed of trust or a mortgage to secure real estate, while a few states use both. It is important to check with a local title company or an attorney to find out how your state’s foreclosure laws operate.
Mortgage States
A mortgage is a two party agreement between the mortgager (borrower) and a mortgagee (lender). Unlike a deed of trust which includes a third party trustee to look after the lender’s interest, when a borrower defaults on a mortgage the lender must proceed with the foreclosure process alone. For this reason the lender will proceed with a judicial foreclosure because the process takes place in a courtroom before a judge. Since the courts are involved it will typically be a longer process in a mortgage state compared to a trustee sale.
Pre-foreclosure Stage
This is the stage of the foreclosure process when it becomes evident that a borrower is late on their payments and therefore becomes delinquent on their loan. This step is the same in both a judicial and non-judicial foreclosure, as it is the step in the process where the lender believes they are at risk for not receiving their money and must take action immediately to avoid further losses.
Lender files a lawsuit
This is the stage in the process which differs from a non-judicial foreclosure as a lender is required to file a lawsuit. The lender must declare to the public that a lawsuit has been initiated by filing a Lis Pendens with the county recorder. The borrower can simply answer the complaint which will often delay the process for a few more months.
Court Proceedings
A lender and a borrower will meet in court under a judge who will oversee the case. If a borrower previously filed an answer to the lender’s complaint a court date will be scheduled. A judge will oversee the details of the case and determine if the lender has the right to proceed with a foreclosure. Typically a lender who abides by the state’s laws will be ruled in favor of and a judge will issue a judgment and set a date for the property to be sold.
Sheriffs Sale
The term sheriff sale refers to the sale in which the property is auctioned off to the highest bidder. Typically the sale is advertised to the public for about a month before the auction. The party successful in bidding for the property is issued a certificate of sale which details their rights concerning the property. However, they cannot legally take ownership until the previous owner’s redemption period has expired. This is a period of time which can be upwards of 12 months, and allows for the borrower to reinstate all past payments, late fees and penalties and take ownership of the home.
Ownership after redemption period
All mortgage states have a redemption period which provides an opportunity for the previous borrower to take back ownership. While some deed of trusts states also have redemption periods, mortgage states are often much longer and can last for up to a year. If the borrower does not reinstate the loan and redeem the property the buyer who was successful during the auction will take title to the property through a sheriffs deed. However, if the buyer does decide to pay the full amount owed in addition to all other late fees and penalties they will be able redeem their previous loan. The trustee will then refund money which was paid to the lender and title will return to the homeowner. During this entire process the homeowner will typically live in the home until everything is sorted out. They cannot be harassed unless it can be proven that they are damaging the property or causing other undue duress.
What about REO or Bank owned property?
An REO (Real Estate Owned) or banked owned property is real estate that goes back to the mortgage company after an unsuccessful foreclosure auction. This can occur from bids not sufficient to meet the lenders minimum requirement or no bids at all.
A Foreclosure sale will typically start with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process. Since potential buyers need to have a cashier’s check for the full amount of the bid and the property is sold as is, many auctions result in properties reverting back to the bank. Once a lender takes ownership of the property they are free to sell it at any price which they desire. Due to the frequent number of foreclosed properties as of late many REO’s have been listed by real estate brokers on the open market using local Multiple Listing Services. Once they are listed and sold they function just like a typical transaction with the exception of a number of stipulations which a lender may require prior to being sold including the seller selecting title and escrow, selling the property as is, and requiring additional disclosures and addendums.
What are the typical Foreclosure Timelines?
Each state has unique foreclosure laws which detail the foreclosure process. However, from the date in which the first payment is missed, up until the home is sold through foreclosure, there is typically a standard process which is followed by most lenders. Below is a timeline which is generally referred to as the industry standard.
Day 1
Your mortgage payment is due on the 1st of the month. Due to financial hardships you do not send the monthly payment as scheduled. The bank will make note that the payment was not made on time.
Day 16 to day 30
Typically your lenders will asses a late charge to your payment. The lender or mortgage servicer (the company that processes the borrower's payments) will attempt to make contact to find out what happened.
Day 45 to day 60
At this time the lender or servicer will send a letter to the borrower often referred to as a "demand" or "breach." This document will point out the exact terms of the mortgage which have been violated. The borrower is then given 30 days to resolve the situation by paying the delinquent payment and all additional fees.
Day 90 to day 150
At this point in the process the barrower’s loan documentation will be sent to the lender’s foreclosure department. The foreclosure department will begin to work with local attorneys and other professionals to begin foreclosure proceedings. Depending on the state where the home is located and the lender’s guidelines, the lender may record a formal notice of foreclosure at the local courthouse, publish details in the local newspaper, and make appropriate court filings.
Day 150 to day 415
At this point the lender will be granted a court order to take ownership of the home. The house will be sold at a foreclosure sale or auction. This wide time range will vary due to different lender guidelines in accordance with each state’s requirements.
Borrowers in states that operate under judicial foreclosures require lenders to retake property titles via the court system. This process can be strenuous and can take lenders almost a year to complete before the home is sold. Borrowers in non-judicial states may have as little as two months.
Day 150 to day 415 and Beyond
After the sale, some states grant borrowers a "redemption period" in which they are given the opportunity to repurchase the property if they have the money. Others force consumers out immediately following the auction. In many cases if a homeowner refused to leave after a court order, a sheriff will formally escort a home owner from the property.
Foreclosure should always be your last option as if all of the above options fail; your home will ultimately be sold through foreclosure despite your best efforts. The process of foreclosure can be very difficult, embarrassing and stressful. Furthermore, foreclosure will have the longest and most devastating effect on your credit and even after a foreclosure occurs, you will still owe your lender money which they may aggressively try to collect through the use of debt collection agencies.
Visit our Foreclosure training center to learn why foreclosure should be your last step, and determine what you need to do in order to negotiate a successes deed in lieu of foreclosure.
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