The second step of the Foreclosure process is the actual Foreclosure itself. We have already covered Pre-Foreclosure and tomorrow we will cover Post-Foreclosure but today, lets examine the actual Foreclosure.
What does Foreclosure actually mean? When you are being foreclosed on, it simply means that the bank is starting the required process by law to take back control of the home which they loaned the money in order to finance the property. The term of the actual Foreclosure can vary, but it starts when the lender files the necessary paperwork (Notice of Default) and ends after auction, often on the courthouse steps.
The bad part about the actual foreclosure process is that there is no pre-determined time length that the foreclosure will last. There are certain state laws which given the time frame, but in today’s market the time frame is mainly determined by the lender. When the lender is ready to proceed with the process, they will do so! The actual Foreclosure process can take as little as a month but it can also last several months.
During the Foreclosure process, the homeowner has a few options to either a)extend the Foreclosure process or b)solve the problem. While both the options above result from the same actions, solving the problem has a few additional options which we will discuss shortly.
The options that can extend the Foreclosure process and/or solve the problem are actions that the homeowner must take in order to show the bank that they are trying to solve the Foreclosure problem. These options include a special forbearance, loan modification, a partial claim, and filing bankruptcy.
Lets briefly discuss these options…
Special Forbearance: this is just a simple negotiation between the homeowners and the lender to arrange a repayment plan based upon the homeowners current financial situation. The homeowner must be able to show to the lender an increase in living expenses or validate why payments were not made and what is being done in order to catch payments back up.
Loan Modification: a loan modification is a change in one or more aspects of the original loan which was written by the lender to cover the loan given to the homeowner. This can be but is not limited to lowering the interest rate on the loan or extending the term of your loan. The idea is to lower the monthly payments so that the homeowner will be able to catch back up over time and in the end will pay off the loan in full.
Partial Claim: your lender may request that the HUD provide an interest free loan in order to bring the homeowners payments current. Your mortgage company must file the necessary paperwork and if HUD agrees to pay the Partial Claim, a lien will be placed on the property as a promissory note in the amount of money provided by HUD. The loan will be interest free and is required to be paid off when the property is sold.
Bankruptcy: Bankruptcy is most often the homeowners last option. Bankruptcy is a way of delaying the foreclosure process but it most frequently results in higher payments for the homeowner after delaying the Foreclosure for a few months. Recently, Foreclosure laws have changed so homeowners can only file bankruptcy to stop a foreclosure one time.
Now lets examine the additional options the homeowner has to solve the problem. Those solutions are to sell the home on the retail market either with an agent, as a FSBO, or to an investor. (I almost left out the the homeowner can just make up the payments…but this does not seem likely or they would have made the payments all along). The homeowner could also decide to hand over their Deed-In -Lieu of Forecolsure.
If the homeowner chooses to sell their own home with an agent, they must consider realtor fees. If they choose to sell as a FSBO, they must keep in mind the time that it may take to find a qualified buyer. Selling to an investor is the option we will discuss at the end.
I would like to explain the Deed-In-Lieu of Foreclosure. All that really means is that the homeowners voluntarily decide to give their home back to the lender and the lender voluntarily decides to take the home back. This is beneficial to the homeowner because they are immediately released form most or all of the debt related to the loan. The lender avoids the notoriety of a public foreclosure and may be able to resell the home under more generous terms.
In closing, the homeowner may choose to sell the property to an investor. An investor may be able to resell the home, catch up back payments, negotiate a short sale, or alleviate the homeowners problem using any number of solutions. In most circumstances, the homeowner will simply sign over control of the property to the investor while giving the investor the right to speak on their behalf with the lender. This gives the investor some time to either negotiate a short sale or come up with another way to sell the property. An investor may also have cash on hand to bring the payments current and then refinance the property.
As an investor, it is your responsibility to take a look at the property and do the due diligence and decide which direction will be best. There are always going to be multiple methods to profit from the property, but it is the investors decision to decide.
In the future I plan on taking the time to explain the investors options in more detail.
In the mean time, be sure to read the first installment of this series “The Foreclosure Process Part I: Pre-Foreclosure” and then come back tomorrow to get the final installment “The Foreclosure Process Part III: Post-Foreclosure”
Cheers,
~ Ross Treakle
