What exactly is Foreclosure?

Foreclosure is a process in which the lender makes legal efforts to seize and sell the property to the new buyer. Foreclosure usually happens when the previous owner fails to pay their agreed-upon mortgage payments. Let’s find more about real estate foreclosure, some of the confusing terms used around the subject. And how homeowners are affected by it.

How does foreclosure work?

It is essential to understand that foreclosure is a legal practice, which takes its basis from the mortgage certificate of the property in question. This deed gives the lender the legal right to confiscate or “Foreclose” the property if the borrower fails to make timely payments.

Generally, the process starts when the borrower misses one or two payments on their mortgage. Failure to make timely payments results in the issuance of a Missed Payment Notice by the lender. If the trend continues, the lender will issue a Demand Letter. While this is more serious than a missed payment notification, the lender may still develop a payment plan for the borrower to catch up on missed payments.

If the situation of missed payments persists, the lender will send a Notice of Default after 90-days. After the notice, the loan is transferred to the lender’s foreclosure department, which typically allows the borrower to settle the loan within 30 days. This period is known as the “Reinstatement Period.”

After the reinstatement period is over, the lender will begin its foreclosure procedure.

What is Pre-Foreclosure?

Pre-foreclosure is legal jargon used to describe the first phase of the legal proceedings, leading to the property being seized from the defaulted borrower. During this phase, the lender files the notice of default on the property as the borrower has missed consecutive payments on the loan. The notice informs the borrower of the legal action being taken against him by the lender. At this point, there are a few options left for the borrower. The lender and the borrower might come to a mutual understanding and develop a payment plan that might help the borrower catch up on their payments.

The pre-foreclosure process can take anywhere between one week and one year. This is because these proceedings differ in different states and are subject to a court proceeding. The lender is required by law to go through housing courts before finalizing a foreclosure and issuing an eviction notice.

Mortgage Forbearance Agreement

A mortgage forbearance agreement is a contract between the lender and the borrower who has missed their payments. This agreement entails that the lender will not pursue legal action if the borrower agrees to follow a mortgage payment plan, eventually allowing them to catch up on their missed payments.

This agreement is usually struck when the lender understands that the borrower cannot make their payments on time due to some legitimate hardship. The lender may choose to reduce or entirely suspend mortgage payments for a fixed period during this period!   

The borrower is obligated to resume their full payment at the end of the forbearance period, including the extra amount that is required to pay the missed payments. This includes principal, interest, taxes, and insurance.

The terms and conditions of these agreements differ from situation to situation. Under normal circumstances, the payments are suspended, but the interest is still being added.

Mortgage Forbearance Vs. Loan Modification

The significant difference between the two is that one is a temporary, short-lived relief for borrowers. While the other is a permanent solution to unaffordable monthly payments.

Mortgage forbearance is a short-term solution for delinquent borrowers who face a sudden change in their financial situation. Multiple reasons can cause this; loss of job, sudden illness, significant accidents, etc.

A loan modification is a remedy for borrowers who are facing a more fundamental financial issue. With the help of loan modification, the lender can develop newer, modified payment plans that are more suited for the borrower’s financial situation. There are several things that the borrower may ask its lender to do to ease the financial burden. For example, reduction of the interest rate or conversion from variable to a fixed interest rate, extension in the length of the loan duration, etc.

COVID-19 Foreclosure Moratorium

Now and then, a country faces inevitable economic, natural, or medical crises which force the government to issue a foreclosure moratorium. The same is the case with the recent pandemic of the COVID-19. Due to the pandemic, there has been countrywide lockdown and restrictions. Because of these restrictions, many borrowers could not pay their mortgage payments on time due to the unavailability of funds. These events have given impetus to the federal government of the USA to issue a countrywide moratorium on foreclosures.

This moratorium had been standing for almost a year. Now, as we write this article, the yearlong suspension has ended on July 31st. Now, what does this means for the borrowers? Let’s find out!

According to the Cares Act, the borrowers have the right to ask for and receive forbearance. This right permits them to stop making payments, even after the moratorium ends temporarily. This period will allow delinquent borrowers to develop the required capital to get current with their mortgage payments.

Another step delinquent borrowers can take short selling the property. Since the real estate market has been on an all-time rise, borrowers can pay their loans to their dues to the bank and get equity generated from the high market price.

Another way for homeowners to get current with their mortgage plan is to ask the bank to restructure their payment plan. This restructuring will help them pay their dues without becoming a burden on their financial situations.

What are the consequences of foreclosure?

Suppose the lender cannot sell a property at the foreclosure auction or chooses not to do it. Lenders, usually banks, take ownership of the real estate. This helps them to expand their portfolio of foreclosed properties.

These properties are like goldmines for real estate investors because sometimes, banks sell these properties at a price lower than the market price. These properties are often bought by investors and sold at higher margins!