Being in the middle of the foreclosure process can be a bit scary and unsettling. Regardless of why you find yourself in this situation, many of the pressures are the same; Choosing which bills to pay, hiding from creditors, not wanting to answer the phone or read the mail, and/or feeling embarrassed to talk to neighbors and friends are some of the realities and burdens that you probably currently share with hundreds of others in California who are in your same situation.
If you are like others we have helped, the fact that you received a Notice of Default, or threatening calls and letters, from your lender hasn't come to you as a surprise. Many people had been struggling to get by for months, and sometimes even years, never quite sure if they'll be able to make their mortgage payment.
The most critical first step to your successful conquering of this situation, quite honestly, is to recognize that there is a pretty serious problem in your life right now. (Sometimes there is more than one). The Notice of Default that you have received, or will soon be receiving, is a warning that says if you don't bring your loans current and continue to make your payments, your house will be repossessed and sold to pay off the money that you owe. I share this not as a scare tactic, just the truth. The first step on the path to finding a solution is to recognize that there is a problem. This is not a judgment or condemnation of you, by any means. Foreclosure could happen to any of us, at any time. It happens to good people for a variety of reasons each and every day.
On a brighter note, the second step is to understand that several potential solutions to your situation already exist. Over the course of the next few pages, we'll share with you what each of these potential solutions are, and give you a basic understanding of each one.
The third step and truly the key to your success, is for you to choose which path to take; which possible solution(s) to explore first, and then to ACT as soon as possible!
The simple truth is, the sooner the situation is resolved, the better off you'll be. One of the most important things at stake here, beyond the fact that you are in danger of losing your home, is your credit. Each time you miss a payment, your credit score goes down. However, a foreclosure stays on your credit record for 10 years!
It is ALMOST ALWAYS in your best interest to do everything you can to stay away from foreclosure and bankruptcy. These can have a long lasting negative effect on your credit, and subsequently, your life. The sooner you act to resolve the situation; the better off you'll be now and in the long run!
To learn more about how important your credit score is, there is a great amount of helpful information available from the following resources:
http://www.nfcc.org/
http://www.myfico.com/CreditEducation/ImproveYourScore.aspx
http://www.investopedia.com/articles/00/091800.asp
http://articles.moneycentral.msn.com/CollegeAndFamily/MoneyInYour20s/9waysToBuildAKillerCreditScore.aspx
Introduction to Foreclosure
"Foreclosure" means different things to different people. Most know that it is a "bad thing", but very few actually have an understanding of what the process is, and how it actually works. Despite what people may tell you, or what you have heard, below are the simple facts about how the foreclosure process works in California.
Once you have finished reading this section, you'll have a better understanding of the California foreclosure process, the specific timelines, and how your lender will proceed to ultimately repossess your house if they don't receive the money that is owed to them.
After that, in Section Two, we'll review what options are available to you, and begin to consider what the best decision for your specific situation might be.
By the end of reading this, you'll have a solid, basic understanding of the California foreclosure process, and what your options are to avoid having your house foreclosed upon, and sold on the courthouse steps.
So, for now let's learn about the California Foreclosure Process...;
Foreclosures in California are primarily administered out of court, although court foreclosures are allowed. Out-of-court foreclosures may be auctioned 111 days after a notice of default is recorded with the county.
Court foreclosures only occur if a lender desires a deficiency judgment. This process gives a borrower up to one year to redeem the property after the foreclosure sale. This is very rare, however, and in almost all cases, foreclosures are handled out of court.
The following outlines the out of court foreclosure process.
Section 1: The California Foreclosure Process
Step One, Day 0:
The process begins when a lender files a Notice of Default with the county recorder identifying the default amount and the date the borrower must pay off the default. The notice is mailed to the borrower and other affected parties.
Up to five business days before the trustee's sale, the borrower may pay off the default plus any applicable costs of foreclosure and stop the foreclosure process. Ninety days after the notice of default is filed, the lender can schedule a trustee's sale of the property.
Step Two, Day 90:
Ninety days after the Notice of Default is recorded, a Notice of Sale must be posted on the property and in one local public location. The Notice of Sale is also published once a week for three weeks in a local newspaper, starting at least 20 days before the sale date. The notice is mailed to the borrower at least 20 days before the sale and to anyone who requests the notice.
The Notice of Sale must contain the date, time, and location of the sale, the property address, and the trustee's contact information. In addition, the Notice of Sale must be recorded with the county recorder at least 14 days before the sale.
Step Three, Day 111+:
The Trustee Sale Auction is held as a public auction at the time and place designated in the Notice of Sale, and conducted by the lender's representative. The successful bidder must pay immediately with cash or cashier's checks in the full amount of the bid. The successful bidder receives a trustee's deed on completion of the sale. The lender usually bids in the amount of the balance due plus costs. If no one else bids, the property reverts to the lender, creating a "bank owned property", commonly known as an REO.
Section 2: Your Options for Stopping Foreclosure
Now that you understand how the general foreclosure process works, let's take a look at the options that exist to help you stop the foreclosure process:
OPTION #1. Contact Your Existing Lender
The first thing an owner in foreclosure may want to do is contact their existing lender. Some lenders are willing to work with those who have fallen behind on their payments and have defaulted on their loans.
Below are explanations of options that your lender may extend to you.
Forbearance
Forbearance is an agreement between the lender and the borrower that reinstates the delinquent loan through the payment of a lump sum or a schedule of payments over a period of time. If a borrower is behind in his or her payment by $2,000, for example, the lender may allow the borrower to pay the money back through installment payments over six months. The lender may decide, on the other hand, to allow the borrower to pay a reduced monthly payment until the borrower has an opportunity to get back on his or her feet and pay any remaining arrearages in one lump sum. The forbearance may be an oral agreement or written contract between the lender and the borrower. Generally these agreements will not exceed more than 12 months.
Payment Plans
A payment plan is similar to forbearance. In some cases when a borrower has fallen behind on their payments due to unforeseen circumstances including loss of employment, medical bills, or other financial hardships, the lender may agree to a short term payment plan, normally between 6 and 18 months. Typically a payment plan will include the normal monthly payment amount, plus the back payments divided by the length of the term of the payment plan. For example, if the monthly mortgage payment is $2,000 per month, and the borrower is $12,000 behind on their payments, a payment plan of $1,000 additional per month over 12 months may be offered. This would result in a new monthly payment of $3,000 per month over the next year.
Loan Modification
A loan modification is a change in any of the terms of the original note. This includes decreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan, or other options at the lender's discretion to assist the borrower through a temporary set back. Generally a lender will consider a loan modification when foreclosure is eminent and the borrower's income has been decreased or unable to make the mortgage payments, but will be able to keep the loan current after the loan modification.
Deed in Lieu of Foreclosure
A deed-in-lieu of foreclosure is a voluntary conveyance of title to the lender. Generally this is a last ditch effort by the borrower to avoid the negative consequences of foreclosure. In return for the voluntary conveyance to the lender, the borrower is often released of any personal responsibility for the mortgage. In order to qualify for a DIL, most lenders state that there must not be a second mortgage or junior liens on the property. Properties with values in excess of the amount owed against the home (to include normal closing costs) should consider selling the property before voluntarily conveying the home to the lender. A deed in lieu of foreclosure can have a slightly less negative impact on the homeowner's credit score than actually having the property proceed all the way through the entire foreclosure process.
OPTION #2. Mortgage Refinancing
Mortgage refinancing is an option where the existing lender or a new lender will allow the borrower to refinance his or her existing mortgage, wrap in any late payments and fees, and cash out part of his or her equity in the home to allow the borrower to regain control of a debilitating financial situation.
Refinances are generally open to borrowers that face a temporary set back in their financial situation, have shown outstanding credit history in the past, and can prove that he or she can support the new mortgage payment.
Typically working with a broker who specializes in refinancing for owners in default is the best option as they have access to a large number of lenders who are more willing to work with borrowers who have fallen behind on their payments.
Second Mortgage, Line of Credit, Retirement Accounts
A lender may offer a second loan or junior lien to a borrower in order to make up any back payments, late fees and other charges necessary to reinstate the loan. The borrower, in return, will be required to make an additional mortgage payment to cover the principal and interest payments on the second loan. Interest rates often rival credit cards and should be looked at with caution.
A borrower may also be able to borrower money from his or her bank or against a 401K, IRA, or pension to use to repay the deficiency and reinstate the loan. Conditions generally do apply to these types of arrangements. Consult your attorney or financial expert before pursuing this route.
OPTION #3. Sell Your Home
Selling a home is a good alternative for borrowers that are unable to reinstate their loan and face eminent foreclosure. This option allows a home owner to try to salvage his or her credit, pay off the loan(s), and retain any remaining equity in the home for starting new. There are two ways that a homeowner in default may want to sell their home.
Selling Via the "Traditional Method"
Listing with an agent can be advantageous, especially in a hot market. By selling on the open market for full retail value, the homeowner can maximize their retention of equity. In a cooling market, however, it can be very difficult to sell a home before the auction date is set. Buyers can make lower offers, include multiple contingencies, and/or can demand that costly repairs are completed prior to the close of escrow.
Selling to an Investor
Selling to an investor has its advantages. Reputable investors have the ability to quickly and quietly buy your home at a fair price, saving your existing credit and allowing you to walk away to start fresh. Though the selling price is typically less, the problem can go away almost immediately and virtually all risk in the transaction is removed.
Selling Via a "Short Sale"
A "Short Sale" is when a homeowner is able to convince their lender(s) to take less than what is currently owed on the mortgage. This can be a relatively extensive process, usually facilitated by an investor or realtor who specializes in the "short sale" process. There are potential tax implications when selling via short sale, so be sure and consult your tax advisor before proceeding down this route.
[SHORT SALE UPDATE: 10/13/07]
There is currently legislation before congress that has been proposed and backed by two separate groups, one spearheaded by President Bush, which will abolish, or temporarily suspend the tax implications of selling via a short sale. Most experts agree that this will most likely pass, but even if it doesn't, there are still multiple options by which you can avoid the taxes required upon the acceptance of a short sale by your lender(s). Be educated and strategic and you can save yourself thousands of dollars if a short sale becomes your only option.
OPTION #4. File Bankruptcy
Filing bankruptcy should be considered with great care. It stays on your record for 10 years and can have significant negative impact on your life for this duration. Due to recent law changes, many of the previous benefits of filing bankruptcy have been removed. Most people should do all they can to avoid bankruptcy and foreclosure (actually having your house reach the auction). These both carry with them long attachments to your credit report, and can have a more significant negative impact on your future. | 