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People that purchase real estateoften rely on financing from banks, credit unions, and other financial institutions. These are large loans, and therefore require collateral. The property itself is used as collateral for mortgage loans, so in the event the borrower defaults on their loan, the financial institution can take steps to seize their property in order to resell it, and recover some or all of their investment. This is done through a foreclosure process.
Foreclosure is a legal pathway in the US to recovering funds owed on a loan. Lenders will consider foreclosing on a property for which a borrower has stopped making payments to the lender. Foreclosures force the sale of the real estate property used as collateral for the loan.
Foreclosures happen after a period of loan default on a mortgage. Allloans have terms which are listed in their disclosure documents. The terms state how much time needs to go by without payment prior to the borrower being subject to foreclosure. These terms are usually somewhere between sixty and ninety days.
When a homeowner defaults on multiple mortgage payments, the lender can begin taking steps to initiate a foreclosure process. A foreclosure is a time-consuming process, and by no meansa quick or easy wayto recoup money. In fact, foreclosures can take months or even years from start to finish, and lenders are required to follow all applicable federal and state laws as they navigate each step. In other words, a foreclosure is a last resort option. In addition to being time-consuming, financial institutions often are only able to recover a portion of the amount owed on the loan. For these reasons, lenders offer defaulting borrowers a number of chances to catch up with their payments prior to opting for foreclosure.
It can be helpful to understand steps that lead to foreclosure. Below is a sample of steps that may take place prior to a foreclosure:
Foreclosures are fairly common, and are subject to a number of compliance regulations, at the federal and state levels. This means that lenders need to be fully educated about compliance requirements when designing their foreclosure processes, and navigating their collections activities. If the lender errs, they can be audited and fined, and the foreclosure in question could be compromised. For this reason, many financial institutions have compliance officers, and utilize systems with built-in compliance measures.
Some financial institutions try to avoid foreclosures by working with the borrower on a short sale. A short sale is the option to sell your property to the highest buyer without going to a foreclosure auction, and then have the lender accept the funds received and forgive the remaining balance. Short sales cause less damage to the borrower’s credit score than if they were to foreclose. Both short sales and foreclosures impact people’s credit ratings significantly, and it can take a while to get back to a healthy credit rating.
In 2008, the US housing market reached a bubble, and many people ended up owing more than their properties were worth after the drop. This was at least partially due to irresponsible lending practices, such a 0% down mortgages, and overinflated real estate appraisals. Many homeowners lost their homes during this time, as governments bailed out financial institutions. This resulted in the US passing new legislation to better regulate lenders.
Foreclosures result from large-scale financial defaults on real estate loans. It is smart to avoid foreclosing whenever possible, and borrowers have other options that can help them stay on top of their payment obligations. It is important to understand your bank’s policies, including the terms of your mortgage. It is also key to educate yourself about state and federal laws that affect you as a borrower.