By Elias Magers
The foreclosure process is the bank’s (or other financial institution) final effort to collect money owed to them.
What often results from the foreclosure process is a repossessed house, damaged credit, and displaced living.
Despite the gloomy impacts, understanding how the foreclosure process works is important because it will help you learn about property ownership, mortgages, and homeowner’s financial options.
Withdrawing Home Loans and Signing the Promissory Note
When someone wants to buy a home, chances are they will go to a loan lender to finance the purchase. They will withdraw a home loan, also known as a mortgage loan.
What exactly is a home loan? A home loan is a sum of money lent to the borrower for the purpose of buying property.
But, before the money is given to the buyer and transferred into escrow, the borrower must first sign a promissory note. This is a written contract agreeing to repay the borrowed money under specified payments in a period of time.
In other words, the borrower could promise to pay the lender a fixed rate of $1,500 monthly for the next 30 years.
Failure to Make Payments Triggers Pre-Foreclosure
The borrower’s obligation, outlined in the promissory note, is to pay the lender back their money. When the borrower fails to make a payment, a red flag is raised and the lender will notice.
The promissory note was an agreement made between lender and borrower. The lender had to make a financial decision based on the borrower’s ability to make payments. Now that the lender is not receiving money, they will look for alternative ways to get compensated. Otherwise, they’ll be out the money loaned to the borrower.
This is how pre-foreclosure starts.
Pre-foreclosure is when a property is in the process of being repossessed. The minute a borrower defaults on their promise, a pre-foreclosure takes place.
Receiving a NOD and the Borrower’s Financial Options
Once a lender flags a borrower for missing their loan payments, they send a Notice of Default (NOD). A NOD is a court-filed public notice that declares the borrower has defaulted on their loan.
As the name suggests, this is a letter from the lender to the borrower notifying them of their missed payments. The borrower has 90 days from when they receive the NOD to fulfill the overdue payments.
Oftentimes, financial hardships are the reason why borrowers miss payments. They simply cannot afford to make the payments. If that’s the case, the borrower has a few financial options to escape the foreclosure process:
Option #1: Equity
In a pre-foreclosure, the borrower’s first option is their home’s equity. If the borrower has equity in their home, they can sell their home to get the money needed to pay off the loan.
For example, the borrower withdrew a home loan for $1 million. If the house they bought is worth $1.5 million, they can sell it to pay the loan in full.
Option #2: Short Sale
A short sale is a request by the borrower when their home is worth less than the loan amount. For example, the total amount of the loan is $1 million but the home is only worth $800,000.
Does the borrower still owe the remaining balance on a home loan after a short sale? No. The remaining loan balance is forgiven. But, the borrower does undergo massive damage to their credit score. This will make it harder to borrow money in the future.
Receiving a Notice of Trustee’s Sale and House Repossession
If the borrower fails to repay the overdue payments within 90-days, a Notice of Trustee’s Sale is issued. A Notice of Trustee’s Sale is a legal notice stating that the borrower’s property will be sold by a trustee within a given time period.
This is the lender’s way of telling the borrower that their house is being put up for auction. This auction may occur within a couple of weeks from the Notice of Trustee’s Sale.
The lender has the power to put the house up for auction as outlined in the promissory note that the borrower agreed to. In fact, the property is considered an asset of the lenders.
The borrower can still cancel the foreclosure process by paying the money back within this period of time. Although, time is now of the essence more than ever.
How Does a Trustee Sale Work?
A trustee sale of a house is an open auction that rewards the highest bidder. These are operated by the trustee, who has explicit power to carry out the specified direction of the lender.
If the home is sold during a trustee sale, the new owner takes immediate possession of the property. So, the defaulted borrower will have little time to vacant the property.
But what happens if the house isn’t sold during the trustee sale? The lender will still want to get as much money back as possible. So, they will hire a real estate agent to list the house and find a buyer.
Final Thoughts on the Foreclosure Process
One of the most crucial aspects of the foreclosure process is time. It’s all about the timeframe. If the borrower is having any difficulty making the payments, the best thing to do is to contact the lender immediately.
Things get messy when the borrower procrastinates the issues. This isn’t a problem that goes away if the borrower ignores it. It has the potential to leave a devastating impact on the borrower’s life.