With home values falling and interest rates rising, more homeowners are threatened with foreclosure. If you're among them, or simply want to know more about the process, you'll find answers to the most frequently asked foreclosure questions here.
What is foreclosure?
Foreclosure is the legal process whereby a lender reclaims the rights to your property and sells it to pay off unpaid mortgages and liens.
What is a notice of default?
A notice of default is the first step in the process. A notice of default is filed by the bank and sent to you by regular and certified mail. Although terms vary by state and loan, notices aren't usually sent until you're at least 60 days past due. The time from notice to completion of the foreclosure process varies by state.
Who can foreclose on my property?
Any lender who issued a loan using your property as collateral or issued a lien against your property can begin the foreclosure process, but the proceeds are disbursed in the order the loans were issued. For example, if your second lender forecloses, your first lender is paid first and the second lender receives whatever is left. The IRS may also foreclose to recover tax liens.
What should I do if I'm behind on my payments?
Contact your lender now if you're behind thirty days, or know you won't be able to make the next payment. Don't wait for them to file a notice of default. It's better to be up-front with them. Explain your situation and ask for help. They may be able to offer a forbearance or modify your mortgage. If you're forced to sell, they may be willing to negotiate the terms for paying off the loan. They may also be willing to accept a Deed-in-Lieu of Foreclosure arrangement where they take back the house and sell it without going through whole process.
I received a notice of default. What should I do?
Don't ignore any letters from your lenders. In some cases, your payments are current, but were misapplied by the bank. By contacting them, you can have the mistake corrected before the process goes further. If you did miss payments, contact your lender now to arrange payment terms. Don't wait until the Sheriff shows up at your door.
How do I stop foreclosure?
You can only stop foreclosure by getting current with the loan and continuing to pay on time. Some banks may also require you to pay late fees, attorney's fees, and other fees in order to stop foreclosure. You can also stop the process by selling the home and using the proceeds to pay off the loan. However, you may still owe the bank money if the sale doesn't cover the full balance owed.
Some people believe they can stop foreclosure by filing for bankruptcy. Unfortunately, bankruptcy only pauses the process. Once the bank files a request to release the stay, it can continue to foreclose. It can also foreclose later if you miss future payments.
What is a deficiency judgment?
The bank can sue you for the remaining balance owed if you sell your home in a short sale or the foreclosure proceeds aren't enough to cover the loan balances. For example, if you have a first loan for $100,000 and a second loan for $75,000 and your home sells for $150,000, the second lender can request a deficiency judgment requiring you to pay the remaining $25,000. Laws governing deficiency judgments vary by state.
Do I have to pay taxes on a short sale or foreclosure?
If the bank accepts the proceeds from a short sale as payment in full, the IRS will count the forgiven balance as taxable income. In some cases, you may also be taxed if a foreclosure sale totals less than the balance owed and the bank forgives the difference. Finally, if you're fortunate enough to receive money from a foreclosure sale, that amount is also taxable. Please see a tax adviser for more information.
Will I get money from the foreclosure?
It's rare for the homeowner to receive money in a foreclosure, but it can happen. You will receive any remaining funds if the home sells for more than the balance due on the home and the lender's foreclosure fees. For example, if the loan balance is $100,000 and the home sells for $125,000, you'll receive $25,000.
However, if the home has increased in value and you can afford lower payments, you should attempt to refinance before allowing the bank to foreclose.
When do I have to move out of the house?
You don't have to move out of your home immediately after receiving a notice of default, but you will need to vacate after the home is sold at auction. The new owner will issue an eviction notice, at which point you typically have 15 to 30 days to move.
What is a right of redemption?
In some states, you have the right to reclaim your home following a foreclosure sale if you can repay the outstanding principal and interest plus the lender's foreclosure fees. Redemption periods vary by state.
Can I get another mortgage later?
A foreclosure stays on your credit report for seven years. During this time, lenders will be wary of giving you another mortgage. You'll also have a harder time getting other kinds of credit or will receive it at less favorable terms. However, it is possible to get another mortgage if your situation and credit have significantly improved since the foreclosure.