Foreclosure

Before getting a loan to buy a property, you must know the definition of foreclosure.

A foreclosure is the process of making a loan due immediately. Technically, a loan becomes due way sooner than initially specified in the Amortization Schedule because the borrower (the mortgagor) didn’t respect the terms of the mortgage contract. But more words are needed to fully cover the definition of a foreclosure.

Other factors that lead to foreclosure are the so-called 5 Ds - death, disease, divorce, drugs, denial (refusal to admit that the current lifestyle is jeopardizing mortgage payments). However, foreclosures usually occur because the borrower missed three to six payments, and cannot bring the loan current. When a loan was used to buy a property, during a foreclosure, the borrower loses the right to sell the property.

After a certain number of missed payments, the mortgagor gets a Notice of Default (NOD). In some states, this is prominently placed on the property. After the NOD, the debtor is given another period of time, usually 90 days, to reinstate the loan (reinstatement period). Lenders tend to be very patient and understanding, especially if the persons affected disclose and discuss any kind of financial problems that caused the late or missed payments.

If the borrower fails to find a solution to the missed payments and cannot refinance the loan with a Foreclosure Bailout Loan during the reinstatement period, then the bank will make the property available at public auction. The person with the highest bid will win the auction. If there is no winner, or if nobody is interested in buying that property at a real estate auction, then the house becomes the property of the lender or Real Estate Owned (REO). The borrower can still live in the house until a buyer is found.

Banks work with real estate brokers or REO Asset Managers to recover their money and interest. But REO are not very attractive because in most cases they are worth less than the total amount owed to the bank.

Eviction is the last phase of foreclosure. The borrower is given a few days to move from the bank’s house. The local police may supervise the eviction as well.

Foreclosures significantly affects the credit score: the higher your credit score, the more it will bite out of it. Actually, it is worst than a short sale (selling a house for less than the mortgagor owes the bank).

In the US, the foreclosure rate has dropped 76% since 2010, when 2.9 million properties had foreclosure filings, to 676,535 properties in 2017. New Jersey is the state with the highest foreclosure rate, followed by Delaware, Maryland, Illinois, and Connecticut.