Foreclosure is a process by which a lender (the bank to which you pay your mortgage) seeks to take possession of your property. Foreclosure can be started once you miss a few (or even one) mortgage payment.
Usually, banks want to avoid foreclosure because it results in a loss on their book. The sale of the home almost never makes up for the mortgage it will have to write-off.
Additionally, banks are financial institutions, not real estate agents, so there are extra costs with setting up the sale process. You can use these disincentives to your advantage. This post will go over the basics of the foreclosure process in California and what you can do to avoid it.
HOW LONG DOES IT TAKE TO FORECLOSE ON A HOUSE?
Foreclosure proceedings start when the lender records a Notice of Deficiency (“NOD”) against your property. The NOD starts the clock on when foreclosure can occur. The lender must mail a copy of the NOD to the borrower within ten business days of recording. A follow-up NOD is mailed within 30 days. Finally, after 90 days the sale date, time, and place are finalized.
However, you can halt this process if you file for bankruptcy. Bankruptcy halts (almost) all legal proceedings until the bankruptcy completed.
The IRS is notified 25 days before the sale. Notices of the sale are published in the local newspaper. The buyer has a right to redeem the property (pay back the missed payments and reclaim ownership) up until five days before the foreclosure sale. If the owner does not redeem, the sale is finalized.
As you can see, the process is complicated but suffice it to say, assuming no complications, a foreclosure will take about six months to a year.
HOW TO AVOID FORECLOSURESix months may sound like a long time however it can pass in a flash. The instant you miss a payment, you need to act quickly to remedy the missed mortgage payment or prepare to hold off the foreclosure. There are many tricks for foreclosure prevention:
WORK WITH YOUR LENDER
Banks are not real estate agents. Banks do not regularly engage in the marketing and selling of properties (at least, good banks don’t). Banks almost always lose money in a foreclosure sale. Banks, therefore, would prefer to avoid a foreclosure.
You can always reach out to your bank to work out an alternative. If your income is steady, your debt-to-income ratio manageable, and your history with the bank is good – you could request reduced interest rates, temporarily suspended payments, reduction in monthly payments, or more.
You can also check with the bank to see if you qualify for a loan modification (under the bank's terms) or with a state or federal program. Loan modification means the bank reduces the principal and alters loan payment terms. Unlike negotiating with the bank directly for some relief, loan modification triggers income tax (any forgiven principle is treated as income by the IRS).
If you cannot negotiate for modification with your bank, you can check for relief from state or federal programs. The most prominent federal program is the Home Affordable Modification Program (“HAMP”). HAMP allows borrowers to refinance their mortgage loan through Freddie Mac or Freddie Mae. You will need to provide proof of income (pay stubs and your income tax return) and a hardship letter explaining your circumstance. You can also seek assistance from CalHFA, the California loan modification program.
A short sale is a sale that occurs after the NOD is recorded but before the bank schedules an auction (sales date). During that period, you can solicit buyers for your property, and the bank is required to consider it. The bank is not required to accept the short sale, but if you give the bank an attractive offer, it may permit it. The short sale could be beneficial for you because your house isn’t officially foreclosed and you can usually get a better deal which absorbs more of the mortgage (which you are still obligated to pay). The bank prefers a short sale because it will have to sell the property regardless and it avoids many of the costs associated with putting up a sale.
DEED IN LIEU OF FORECLOSURE
Deed in lieu means that you voluntarily sign over the deed of your property to the bank. You suffer the same consequences to your credit as a foreclosure. Many banks are reluctant to grant a deed in lieu because there is huge risk involved, including, you could sue to get the property back, and the bank is required to satisfy any secondary mortgage taken out on the property.
If you're facing foreclosure, know that you can sell your home until the bank takes possession of it, or it is sold at an auction. An experienced real estate agent, like the team at Steele San Diego Homes can work with you to figure out how much your home is worth, sell your home, and ultimately avoid foreclosure.