Mortgage foreclosure begins after a homeowner falls behind on mortgage payments. The lender begins the legal process of selling the home at auction in order to get payment for the loan. The process involves numerous steps, including notification to the homeowner.
This won’t happen overnight. Usually a lender won’t begin the mortgage foreclosure process until several payments are missed, often three or four. That gives you time to try some alternate measures, such as:
Deed in lieu of foreclosure (best option)
A deed in lieu of foreclosure is a deed instrument in which a mortgagor (the borrower) conveys all interest in a real property to the mortgagee (the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.
The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts his/her credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy.
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties.
A short sale is often used as an alternative to mortgage foreclosure because it mitigates additional fees and costs to both the creditor and borrower. Both often result in a negative credit report against the property owner.
A loan modification is a permanent change in one or more of the terms of a borrower’s loan, allows the loan to be reinstated, and results in a payment the borrower can afford. Two programs are:
- The Home Affordable Modification Program (HAMP) is a federal program, set up to help eligible home owners with loan modifications on their home mortgage debt. It is being set up in the context of the ongoing sub-prime mortgage crisis in the debt markets, continuing from 2008.
- The Home Affordable Refinance Program (HARP) is a federal program, set up by the Federal Housing Finance Agency in March 2009, to help underwater and near-underwater homeowners refinance their mortgages. Unlike the Home Affordable Modification Program (HAMP), which assists homeowners who are in danger of foreclosure, this program benefits homeowners whose mortgage payments are current, but who cannot refinance due to dropping home prices in the wake of the U.S. housing market correction.
Until recently, successful defenses against mortgage foreclosure were relatively rare. But that is changing rapidly — more homeowners are successfully challenging mortgage foreclosure actions.
This change is due, in large part, to the unearthing of more and more evidence that the real estate industry has been rife with fraudulent and predatory lending practices. Because of this evidence, courts that once rubber-stamped foreclosure actions are now shifting their sympathies towards homeowners.
Homeowners and their attorneys are taking advantage of this change in judicial attitude, and challenging mortgage foreclosure actions in many different ways.
If you are facing mortgage foreclosure, bankruptcy might be able to help. In many cases, filing Chapter 7 bankruptcy can delay the mortgage foreclosure by a number of months. Some people may be able to save their home by filing for Chapter 13 bankruptcy.