What Happens During the Foreclosure Process?

The home foreclosure process is a hot topic in the current economy. It’s unfortunate, but it’s true. With millions of Americans being foreclosed on in 2009, the need for quality information has never been greater. That’s where this blog comes in.

In today’s dose of Mortgage Wisdom, I’ll explain what happens during foreclosure so homeowners will know what to expect. Hopefully, this will help some folks avoid the process altogether, as well.

1. The Homeowner Misses Payments

The whole process begins when a homeowner falls behind on the mortgage payments. Now, when this happens, a foreclosure is not necessarily going to happen. Many people temporarily fall behind on their monthly payments, but then get caught up again. In fact, most lenders offer repayment plans and other techniques to help homeowners get back on track. Still, this is the first thing that happens in a foreclosure process, so it needs to be the start of our list.

2. The Lender Sends Notices

If you start missing payments on your mortgage loan, you’ll start receiving letters (and possibly phone calls) from the lender. When this happens will vary from one lender to the next, but it’s the inevitable next step in the path to home foreclosure.

Keep in mind that lenders want to avoid foreclosing on a home, if they can avoid it in some way. They are in the business of lending money, not managing and selling real estate. So if you think you won’t be able to afford your mortgage payments, or if you need an opportunity to get caught up with the payments, it’s a good idea to contact your lender.

3. The Homeowner and Lender May Find a Solution

This does not always happen during the foreclosure process, but it’s an option you should pursue. In particular, if you’ve only suffered a temporary financial setback, and you now have the ability to get caught up on your mortgage payments … contact your lender and let them know. Ask them about reinstatement (paying off back payments in a lump sum), repayment and forbearance (spreading the missed payments over future installments).

Again, these programs are only a viable option if your financial problems are temporary. If you simply cannot afford your mortgage payments anymore, reinstatement and forbearance are not good options for you. In this situation you should consider a home loan modification (if your lender offers them) or selling the home through a short sale process. President Obama’s mortgage relief plan is designed to give lenders and loan servicers cash incentives for modifying home loans to prevent foreclosure.

4. The Lender Starts the Foreclosure Filing

If the homeowner continues to default on the loan, the lender will file the necessary paperwork to foreclose on the home. This is typically the next thing that happens during a foreclosure process, if none of the aforementioned solutions will work. This process varies from state to state, but it is designed to get the courts involved in the process (to prevent unjustified foreclosures). At some point, the case will go before a judge who must decide if the lender is legally permitted to foreclose on the home.

A rising trend among homeowners is to ask the lender to produce the original note for the mortgage. In many cases this will delay the foreclosure process, especially if the loan has been packaged and resold multiple times (which is common these days). This technique may help buy some time, but there’s no point in doing it unless you can get caught up on your payments.

5. The Lender Will Foreclose and Sell the Home

If the home is not sold through a real estate short sale (see item #3 above), or a solution of some kind is not found, the lender will foreclose on the house — i.e., take ownership of it. A foreclosure sale / auction is typically the next thing that happens during the process. The lender wants to get the home off their hands as quickly as possible, so they’ll usually price it below market value to sell it fast.

Incidentally, this is why so many investors buy foreclosure properties in the first place. It’s an opportunity to purchase a home for less than market value.

Conclusion and Summary

While the process varies from one state to another, this is generally what happens during a home foreclosure process. Here’s what you should take away from this lesson. If you are falling behind on your mortgage payments, the worst thing you can do is nothing. You should take action as soon as possible to avoid foreclosure if at all possible.

If your financial problems are temporary, and you want to get back on track with your payments, ask your lender about repayment or forbearance. See if you’re eligible for a home loan modification to make the payments more affordable. If you just can’t afford the home anymore, investigage your selling options through the short sale process. Whatever you decide to do, at least you know what happens in a foreclosure filing.

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