If one is in a foreclosure, or is falling behind on mortgage payments, it’s crucial to understand the basics of the foreclosure process in order to avoid its dire consequences.
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower, who has stopped making payments to the lender, by forcing the sale of the asset used as the collateral for the loan.
The main players involved in residential mortgage loan transactions and foreclosures are:
The borrower: The borrower is the individual (the homeowner) who borrows money and pledges the home as security to the lender for the loan.
The lender: The lender gives the loan to the borrower.
The investor: An investor buys loans from lenders.
The service: The service (the company the borrower has to make monthly payment to) manages the loan account on behalf of the lender or investor.
Loan servicers, collect and process loan payments and pursue foreclosure when the borrower stops making payments.
There are two types of foreclosure:
Judicial foreclosure: it requires the lender to go through the court system to take back ownership of the property. The lender will have to initiate foreclosure by filing a lawsuit against the borrower. All the parties have to be notified of the foreclosure. A judicial decision is announced (usually at a short hearing) after the exchange of pleadings.
Non-judicial foreclosure: here, if a power of sale clause is mentioned in the mortgage or if such a clause was used in a deed of trust, then the lender can use foreclosure by power of sale. There is no court supervision.
In some cases lenders make adjustments to the borrower’s repayment schedule so that he/she can afford the payments and thus retain ownership. This situation is known as special forbearance or mortgage modification.
In case of both judicial and non-judicial foreclosures, the foreclosing party must typically mail the other party stating that foreclosure proceedings will start upon non-payment of the loan amount. The notice generally provides 30 days to the borrower to pay the due amounts.
Defenses to foreclosure
The borrower can pursue certain defenses depending upon the situation:
- The foreclosing party can’t prove that it owns the debt.
- The borrower is on active duty in the military and is entitled to protection from foreclosure under the Service members Civil Relief Act (SCRA).
- The foreclosing party did not follow the required procedure to foreclose.