Foreclosure Demystified

Foreclosure is defined as the legal process by which a lender takes control of a property, evicts the homeowner and sells the home after a homeowner is unable to make full principal and interest payments on his or her mortgage, as stipulated in the mortgage contract. In layman’s terms, if someone cannot pay their mortgage, the bank that provided the mortgage will usually attempt to take the property from the homeowner and then sell the property in order to recoup or prevent further losses. Sounds simple right? In theory it is, but in reality, the foreclosure process is complicated and can take years. I will explain that later, but first I want to talk about a few reasons that a homeowner may fall into foreclosure.

One reason for falling into foreclosure is unanticipated expenses such as a medical expense. Sometimes a catastrophic illness that subjects a person to large medical bills forces a person to have to choose between paying a mortgage or paying for medication. This is sad but true. Another reason can be over-indulgence; spending money on frivolous things and not leaving enough back to pay the mortgage. This may sound shocking, but this is common. Another reason can be a divorce, imagine living in marital bliss, you and your partner agree to split all the bills, including the mortgage, and then suddenly your partner decides things are not working and moves out, leaving you to handle all the bills. There can be legal ramifications for leaving you high and dry, but the recourse is usually down the road after you have already been buried under an avalanche of bills. These are just a few examples but use your imagination and I’m sure you can come up with a few more.

Once, you have missed you mortgage payment for 90 days the bank will typically take action. They will send notice of default and begin the official foreclosure process. The process however can take a long time, because there are laws that lenders and servicers must adhere to while initiating foreclosure. Any action that requires court approval usually takes a long time. Many states also require mediation before enforcement action can be taken. I have seen foreclosures take as long as 5 years to complete due to all the procedures that must be adhered to.

Once a foreclosure action has started you have to make a choice as to whether it is worth fighting to save the home. This all depends on the circumstance that brought you to foreclosure. One solution is to modify the loan. This requires bank approval, and in many cases, a bank will modify the loan in order to reduce the monthly payment. This makes the mortgage more manageable. Another solution is a short sale. This is typically done when the house is under water; meaning that the amount owed on the property is more than the actual value of the property. The bank will sometimes approve a sale for less than what the homeowner owes the bank. The caveat here is that the homeowner (seller) is not allowed to make any profit from the sale. We saw this frequently after the financial crisis in 2008.

Foreclosures can be embarrassing, because it suggests an inability to handle responsibilities. I however have seen that many foreclosures occur due to extenuating circumstances and in many instances, it is out of the homeowner’s control. The individuals that are financially irresponsible may need money management courses, but even they should not be ridiculed, because sometimes there is a psychological component that creates an issue with money management. If you are going through foreclosure you should first decide if you want to stay in your home, at that point there are resources available to assist you with the various solutions mentioned above. Feel free to reach out to our company with any questions.

The information above is provided for educational and informational purposes only and should not be construed as fact or as legal advice or as an offer to perform legal services on any subject matter. For legal advice please consult a licensed attorney.