Understanding How Foreclosures Work
News of skyrocketing foreclosure rates seem to be the main focus of today's media. Thousands of homeowners are failing to keep up with their mortgage payments. They may have lost their job, or interest rates may have risen too high. They may simply have given up because their house is worth less than their mortgage, reducing any hopes of equity. Whatever the case, you should understand how a foreclosure works.
A Mortgage Is a Legal Promise
When you borrow money from a bank, known commonly as a mortgage, you make a promise to pay the money back with interest. When you sign your mortgage papers during your closing, you are made aware of what happens should you fail to pay your mortgage.
Today's economy has made it hard for many families to keep up with their mortgage payments. Lay-offs, rising property/school taxes, soaring heating and electricity costs — they all have taken their toll on people's living expenses.
If you are unable to pay your mortgage, you could lose your home. It's helpful to try to refinance your home to get a lower monthly payment before foreclosure procedures kick in.
Learn the Key Steps to Foreclosures
Laws for foreclosures vary from state to state. In general, there are three steps involved in any foreclosure.
The process begins when a borrower fails to pay his or her mortgage, known as defaulting on your loan. Once a borrower is in default, the bank or mortgage company will take the borrower to court. The court hearing is necessary for a judgment declaring the bank as owner of the house because the borrower has defaulted.
Before the auction or sale can take place, a "judicial foreclosure "or "power of sale" must take place. In a judicial foreclosure, the most common foreclosure method, the borrower and lender go to court where a judge hears both sides. The sales value of the home is determined and the house is put up for auction or for sale. Once the house sells, lien holders are paid what they are due and any remaining amount goes to the borrower.
In a "power of sale" foreclosure, the lender and borrower avoid going to court. The house is sold and, again, the lien holders are paid what they are owed and any remaining money goes to the borrower.
Shortly before a court hearing, the bank or mortgage holder issues a "Lis Pendens." Quite simply, this means "case pending." This procedure hands ownership to the bank, but the borrower is given a certain amount of time to make full restitution. Should that date pass and the borrower is still unable to pay the owed amount, the house title transfers to the bank or mortgage company and the court decision is finalized. The financial institution then sells or auctions the house.
Variations To Common Foreclosure Methods
In past decades, all states used the "strict foreclosure" rule. In this case, if a borrower defaulted on their mortgage, the bank and the borrower went to court, where the borrower was ordered to pay back the loan amount.
States such as New Hampshire and Vermont still use this method. Should the borrower remain unable to pay back the money, the bank can then do what it would like with the home. With a strict foreclosure, the home value must be less than the mortgage v