What is Foreclosure and How Can I Stop it?

What is the foreclosure process?

1. After a payment is missed, the lender will typically send out a notice of default. This is a first legal notification towards processing a foreclosure. This notice is filed publicly in CO and WI.
2. If payments are not caught up, a bank may process a lis pendens which is a legal notice of filing for a foreclosure.
3. The bank will hire an attorney, typically referred to as a trustee or substitute of trustee, to file a notice of sale. 
   
   1.  A notice of sale means that the bank is providing notice to the mortgage owner that they will be selling the property at an auction on a given date and timeframe in order to recover the amount owed on the loan. 
   2. A notice of sale is filed with the county clerk records and viewable by the public online or at the courthouse. 
4. On the day of the sale, the trustee or substitute of trustee will begin the auction at the county courthouse or online. If the property is sold, it now belongs to the new owner. If it is not sold, it will become the property of the bank. 

What is the impact of having a foreclosure on my record?

1. A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period of 5 years.
2. On any future application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 form that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will affect future rates.
3. Credit Score may be lowered anywhere from 250 to more than 300 points. Typically will affect a credit score for over 3 years.
4. Foreclosure will remain as a public record permanently, and on a person’s credit history for 10 years or more.
5. Foreclosure is the most challenging issue against a security clearance outside a serious misdemeanor or felony conviction. If a client has a foreclosure and is a police officer, in the military, in the CIA, security, or any other position that requires a security clearance, in almost all cases clearance will be revoked and position will be terminated.
6. Employers have the right and are actively checking the credit of all employees who are in sensitive positions. In many cases, a foreclosure is reason for immediate reassignment or termination.

How can I stop a foreclosure?

1. At a high level, your primary options are either pay off the full loan or make the loan current.
   
   1. Note that you have to get a pay off quote or a reinstatement quote
   2. Your quotes will include the principle and interest that is in arrears, as well as any taxes they paid on your behalf and attorney fees.
   3. By the time you have received a notice of sale, the bank has hired an attorney. This means that the bank will need to calculate their costs plus the attorney’s costs. 
   4. Most banks will take 7-10 days to process a request for a quote and will usually only give you one quote or the other.
2. Other options can include:
   
   1. Ask for a postponement
      
      1. Sometimes, if it’s the first notice of sale, simply asking for a postponement can work. 
   2. Deferment
      
      1. Where the bank will agree for you to pay at a later date. 
      2. Often synonymous with forbearance.
   3. Forbearance
      
      1. When your mortgage servicer or lender allows you to pause (suspend) or reduce your mortgage payments for a limited period of time while you regain your financial footing.
      2. We have seen that if this agreement is done to stop a foreclosure, they will usually pause the foreclosure process. However, if you do not hold to your agreement, they can resume the foreclosure process where they left off.
   4. Loan modification
      
      1. Is when your bank agrees to a change in your loan terms. 
      2. They can essentially modify your loan to roll in the arrears and decrease your monthly payment.
      3. However, this may be achieved by increasing the number of years of your loan and/or changing your interest rate. 
      4. Since somewhere around 90% of loan modifications fail, banks are hesitant to modify a loan that is in default. 
      5. They will require you to bare your financial soul every month and process a lot of paperwork to prove that you can qualify for the modified loan.
   5. Deed in lieu of foreclosure
      
      1. This is where you sign over the deed of the house to the bank so that they don’t have to process a foreclosure
      2. Most banks will not do this when it is close to an auction date
   6. Short sale
      
      1. This is when you sell your house for less than is owed.
      2. It is a lengthy process and the house must also appraise for sale price.
      3. This is a much better option than a foreclosure as it does not have the long term credit impact as a foreclosure.
   7. Sell the house
      
      1. If you put the house under contract for sale, the bank can postpone the auction to make time for the sale. 
      2. However, they usually won’t postpone past the next auction date. 
      3. In most cases, the bank is only required to give you a 3 week notice of sale. Most buyers with traditional financing cannot move fast enough. You’ll typically need to sell to a cash buyer.