What is foreclosure?

Foreclosure is a legal process in which a person who has obtained or made a mortgage loses his right to the mortgaged property. The process is initiated by the lender with the result that the home is repossessed and/or sold at an auction. This generally occurs if the owner, called the mortgagee, has failed to make regular mortgage payments over a period of time. The period of time may vary with each lender, but the process may be instituted after as little as four (4) months. At this point the lender, which may be a bank, Mortgage Company or even an individual, will begin the foreclosure process. The lender is known as the mortgagor. The delinquent mortgagee may be subject to a judicial or non-judicial foreclosure. In a judicial foreclosure the lender must file a complaint against the mortgagee in the court of the county where the mortgage property exists. The court will make a determination as to whether the borrower is indeed in default. The borrower is then given a prescribed length of time to pay any outstanding debt on the mortgage to bring it current, plus any court costs that the lender has incurred. If the borrower fails to make the total payment within this length of time, the lender will obtain a decree of sale which permits the sheriff of the county having jurisdiction over the property to sell the home. A foreclosure sale must be broadly advertised at least four to six weeks prior to the sale. At the end of the six week period a public auction is conducted and the property is sold to the highest bidder. Any individual or legal entity may bid on the property, including the original lender. Following the auction, the referee, which is the officer conducting the sale, will execute a deed to the new purchaser. The referee will proceed to pay any outstanding balance of the mortgage, interests and court costs, using the proceeds from the sale. This process is finalized by the referee receiving a receipt from the lender. Within thirty days, the referee will file a report of sale with the county clerk; this will include the receipt received from the lender. This action culminates in the actual confirmation of the sale.

A non-judicial foreclosure is one which takes place outside of the oversight of the county court. In this procedure a power of sale clause is put into effect. A power of sale clause must exist within the wording of the original mortgage stipulating that the mortgagee pre-authorizes the sale of the mortgaged property for the purpose of paying off any balance of the loan in the event of his or her default. A non-judicial foreclosure is conducted by a neutral party known as a trustee; the trustee acts on behalf of the borrower.

A mortgage is a legal instrument - a duly signed and notarized document filed at the office of the county clerk - which pledges real estate, most commonly a house, as security for repayment of a loan. In affect, it is a guarantee that a loan will be paid back, allowing individuals to buy property without actually possessing sufficient funds at the outset. The mortgage consists, technically, of two legal instruments: a promissory note and the mortgage. The promissory note outlines the actual terms for the repayment of the loan, such as the amount of monthly payments, the term of the mortgage which may be, fifteen, twenty, thirty or even forty years, the interest rate, etc. The mortgage is the instrument which indicates specifically that the property is security for the loan; it will also contain a legal description, language which traces the beginning point of the land owned and its dimensions. The property includes the land and any minerals it may contain plus any improvements on the land such as a house, a garage, a shed or any structure. In order to obtain a mortgage, the potential borrower will usually undergo a credit and employment check to insure his or her ability to make the required monthly loan payments. The property itself will be subjected to an appraisal to determine that it is saleable and worth the amount of the applied-for mortgage. Indeed, the lender has a large investment at stake; the appraisal will indicate if the house is worth the investment.

Once the screening processes are completed the prospective buyer, the seller and the lender will appear together at a real-estate "closing"; usually an attorney is present for each of the three parties. At this time funds are "transferred" to the borrower to buy the house from the seller. The promissory note and the mortgage are signed and the final costs are paid. The new homeowner will now take on the responsibility of making monthly mortgage payments. Monthly payments will include interests calculated according to the agreed upon interest rate and the principal payment. The principal actually pays down the amount of the loan. If the borrower begins to miss mortgage payments over a period of time, he runs the risk of entering into default of his loan agreement, subjecting himself to the possibility of foreclosure.

How may a homeowner avoid foreclosure?

The primary means of avoiding foreclosure and subsequent loss of property is for the homeowner to notify the lender immediately if he or she begins to encounter serious financial problems which may impact his or her ability to repay the loan. Inasmuch as the lender also has an investment in the property, they are willing to work with the mortgagee and construct a plan whereby the mortgage may still be paid. Many borrowers, probably due to despair, affect a state of denial and ignore warnings from the lender. Other homeowners may actually abandon the property if they feel that they are in over their heads. Abandoning the property does not erase the borrower's obligation to pay back the loan. This unpaid debt will follow the homeowner through his or her lifetime, making it difficult to obtain credit or make future major purchases.

Individuals who are in danger of default and subsequent foreclosure are sometimes eligible for special considerations. These considerations must be sought and researched carefully lest the borrower fall prey to various types of scams. Lenders are often willing to arrange repayment plans based on the homeowners current financial situation resulting from a reduction of income due to loss or change of employment or even loss of anther party named on the loan instrument. Lenders may actually temporarily suspend mortgage payments; the borrower will have to provide documentation of his financial situation. When repayment resumes the lender will need to know that the borrower will be able to successfully carry out the new terms of the mortgage. Mortgages may be modified, refinanced or extended to accommodate the new financial status of the mortgagee. Thus, in spite of the financial setback, the homeowner will be enabled to retain his property. Persons with FHA (Federal Housing Authority) mortgages may apply for a "partial claim" one-time payment from the Department of Housing and Urban Development. This amount will help to bring the mortgage current. A second lien is placed on the property with a new promissory note. It will be required to be paid after the original mortgage is paid off.

A last attempt for some borrowers is a deed in lieu of foreclosure where the borrower gives back the property to the lender. This is usually the last resort of a borrower who doesn't qualify for any other special considerations, claims or refinancing and has been unable to benefit from a pre-foreclosure sale where the property would be sold for less money than the outstanding debt. The main issue is to take action in a timely fashion. Financial problems are unpredictable and may happen to anyone. Ignoring the seriousness of missing mortgage payments may not only result in the loss of the home from foreclosure, but the borrower may also become subject to a deficiency judgment. A deficient judgment is lodged against the borrower if the foreclosed property is now worth less than the outstanding debt. This may occur from poor upkeep of the property or changing real estate trends in an area.