Foreclosure is a legal process in which the lender attempts to recover the balance of a loan from a borrower (who has stopped making payment to the lender), by forcing the sale of the asset used as the collateral for the loan. This often leads to the owner having to vacate their home or be evicted.
There are two types of foreclosure: the judicial foreclosure and the non-judicial foreclosure.
The judicial foreclosure is available in most states and required in many (not in California). This type of foreclosure involves the sale of the property under the supervision of the Court, which implies that the lender needs to file a lawsuit against the borrower. The property is then subjected to auction by the county sheriff or another officer of the court.
The non-judicial foreclosure or “Foreclosure by power of sale” is authorized in many states (including California) and involves the sale of the property without the supervision of the Court, which makes the process generally much faster and cheaper. The lender or its representative will give the borrower a notice of default and will then conduct a public auction, similar to the sheriff’s auction.
In both cases, the highest bidder of the auction will become the owner of the real property. Some further legal action, such as an eviction notice, might be necessary if the occupant of the property refuses to vacate the property voluntarily.
In most jurisdictions the lender will have to conduct a title search of the real property and inform any person who might have a lien on the property.
The lender will also have to notice the IRS (Internal Revenue Service).
Foreclosure rarely comes as a surprise and recently is not uncommon. Sometimes it is because you lose your job, get divorced or face unexpected medical bills and you can’t afford to pay your lender anymore.
Once you start missing payments on your loan, it will take your lender a few months to start with the foreclosure process. But the first piece of advice is- DO NOT WAIT. If you realize that you really cannot afford repaying your loan anymore, do not waste time and energy trying to complete the payments every month. The second piece of advice is- DON’T PANIC. You have more time on your hands that you think and the foreclosure process doesn’t happen over night. So take time to ask yourself the good questions and consider all of your options.
The first thing you have to figure out is: Do I want to try to keep my house or not? Even if it is difficult you will have to get rid of all the emotional implications of leaving your house and ask yourself if you can afford your loan or not anymore.
If you decide to stay we advise you to contact a Housing counselor via the Department of Housing and Urban Development and find out if you are eligible for the Make Home Affordable Program. The Housing counselor will help you deal with your lender, initiate the negotiations and write any needed letter.
To decide if it is a good thing for you to try to keep your house, you should find out the value of your house and if you have equity in your house. Equity means that the value of your house is greater than the amount of the mortgage you owe. Unfortunately, with the recent crash of the real estate market it is more common for a homeowner to find out that they owe more that the actual value of their house.
Then you have to find out if you can afford to repay your loan according to your income. If your monthly mortgage does NOT exceed between 29% to 33% of your gross monthly income then it might be worth it to stay in your house. If it exceeds this ratio then maybe giving up and accepting the foreclosure is your best option. Also make sure you take into consideration all the other expenses you have monthly, if your kids are in college or if you have any medical bills. There are several calculators online that can help you determine how much you can really afford.
If you decide to give up paying your mortgage, you will at least save money between the moment you stopped paying and the end of the foreclosure process which will help you get a fresh start.