Although the foreclosure process varies by state, mortgage lenders follow similar protocol that begins when borrowers default on their real estate loan. Lenders can commence with foreclosure action once payments are 31 days delinquent, but most are willing to work with mortgagors to create a payment plan to cure loan arrears.
The first step of the foreclosure process begins when borrowers breach their contract. Banks send a collection notice which includes the cost of late fees and penalties, along with a date which the funds must be paid before the lender moves forward with preforeclosure action. If borrowers cure past due payments according to terms outlined in the collection letter, foreclosure can be avoided.
If mortgagors ignore collection letters or when lenders are unable to offer solutions which could stop foreclosure, the next step involves the issuance of a demand letter which requires mortgagors to pay the full amount owed on their mortgage note. Payment demand letters are issued when loan payments become 60 days delinquent.
It is important to note that banks prefer to avoid foreclosure because it is expensive and time-consuming. Mortgage lenders are willing to work with borrowers by developing a payment plan through a real estate forbearance or loan modification.
If borrowers are financially capable of entering into a payment plan they are assigned to a loss mitigator who acts as a mediator between lenders and borrowers. Their primary role is to keep bank losses at a minimum while assisting borrowers to become current with mortgage payments.
Mortgagors are usually required to submit financial records to their loss mitigator. Banks commonly request wage records, bank statements, tax returns, property insurance and taxes, homeowner’s association dues, and a detailed list of income and expenses.
When borrowers are financially incapable of curing mortgage arrears or staying current with future payments, banks may agree to enter into a real estate short sale contract. This is a complex matter which often requires assistance from a real estate attorney.
In essence, banks agree to accept less than the full balance of the loan in exchange for quick sale of the property. The majority of lenders require borrowers to have a prequalified buyer in place before providing short sale approval. Each lender handles the short sale process differently, so mortgagors will need to work closely with their bank loss mitigator to ensure proper protocol is followed.
When real estate short sales are not an option, lenders may offer borrowers a deed in lieu of foreclosure. This option requires borrowers to return their property to the lender and lose all vested funds.
It is important to note that many banks issue deficiency judgments with real estate short sales and deed in lieu agreements. Borrowers can be held responsible for monetary deficiencies when property is sold short of the outstanding loan balance. These funds are due at the time the property is sold. Banks can obtain a court-ordered judgment if mortgagors are unable to pay deficiency amounts in full. Judgments remain on credit reports until paid and cause serious harm to borrowers credit scores.
If none of the aforementioned solutions resolve the issue, banks must file a Notice of Default through local courts. Once recorded, NODs become a matter of public record and are published as a pending foreclosure.
Mortgage providers can sell the property through a public foreclosure auction within 30 days of filing the default notice. Depending on state laws and the type of foreclosure, public auctions can occur at the property’s physical location, local courthouses, or a public auction facility.
If no one submits an appropriate bid on the property through foreclosure auctions the real estate is returned to the bank. Lenders can either hold the property and sell it for profit at a later time, or list the property for sale through their loss mitigation department or a realtor.
Bank owned foreclosure real estate is sold with a clear title and is typically priced between 5- and 20-percent below market value. Buyers must obtain prequalified financing prior to submitting an offer on the property. Banks rarely reduce the listing price of bank owned homes, so buyers should be prepared to pay the full price unless problems are discovered during home inspections.