What is Foreclosure?
When buying a home or refinancing during the ownership of the home, a homeowner may take a loan or mortgage out from a lender in order to help pay for the home. However, when the necessary payments on the mortgage aren’t made on time, a lender can put a lien on the home to secure repayment of the loan. When the homeowner fails to make the payments, the lender can foreclose on the home, meaning they force the sale of the home in order to pay off the money owed.
There are two types of foreclosures. First, there is a Nonjudicial Foreclosure, which gives the lender the authority to sell the home to pay off the money owed. This is the most common form of foreclosure, and requires there to be a “Power of Sale Clause” in the initial contract when securing the loan. Second, there is a Judicial Foreclosure, which involves the lender filing a lawsuit to get a court order to sell the home to the highest bidder in an auction. This form of foreclosure is rare, but it gives the homeowner the “Right of Redemption” allowing for extra time to pay off the loan and regain ownership of the home debt free.
Stopping a Foreclosure
A homeowner has up until 5 days before the foreclosure sale to cure the default and to stop the foreclosure process. This is called “reinstatement” of the loan. During the 21-day period after the lender is authorized to sell the home, any person or institution (like a bank) with an interest in the home has the right to redeem the home up until the nonjudicial foreclosure sale or auction. This means that they must pay the entire loan in full.
Forbearance is when a lender allows a homeowner to pause, or reduce mortgage payments for a limited period of time while regaining financial stability. This doesn’t mean mortgage payments are forgiven or erased. The homeowner is still required to repay any missed or reduced payments in the future.
It is imperative that the homeowner understands how the forbearance will be repaid because there can be different forbearance programs or options, depending on the type of your loan. If and when the homeowner’s income is restored, the normal mortgage payments will resume. It is best to begin payments as soon as financially possible so to reduce the future obligation.
A Short Sale is a pre-foreclosure sale by the homeowner for less than the mortgage owed, releasing the property from the mortgage. A short sale requires the lender’s approval. However, this method is often preferable to lenders. Short sales were designed to spur home sales by requiring certain debt forgiveness, and allowing homeowners the ability to sell their homes that they might owe more on than what the property is worth.
Many homeowners can seek to sell their homes in a short sale to avoid the threat of foreclosure action and the credit damage that would accompany a foreclosure. This may act as a debt forgiveness by the lender or, in many times, a short sale will act as a loan modification, which means the homeowner may owe the difference between the sale and the mortgage amount.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows homeowners with enough income to repay all or part of the mortgage as an alternative to liquidation. Under a chapter 13 bankruptcy, a homeowner can propose a 3-5 year repayment plan to a lender in order to pay off the mortgage owed and to avoid a foreclosure of their home. If foreclosure proceedings have already commenced, filing a chapter 13 bankruptcy will suspend the foreclosure.
The hope is that the bankruptcy plan will free enough of the homeowner’s income that they can be able to make regular mortgage payments and keep their home. This method is generally used by homeowners who want to keep their home when they have more equity in the home than they can protect with their California bankruptcy exemption.
If you are experiencing a threat of foreclosure on your home, think you may need to speak to a real estate attorney and are in need of assistance on the best plan of action, contact our office at (858) 926-5797.