Lenders use foreclosure to reclaim a home from homeowners who are unable to pay their mortgages. Banks will attempt to get their money back by bringing legal action against a borrower who has stopped making payments. They may, for example, take possession of your home, sell it, and use the proceeds to pay off your mortgage. Understanding why foreclosures happen and how they operate will assist you in navigating, or better still, avoiding, the complicated phase.
Why Foreclosures Occur
When purchasing a large piece of land, such as a house, you cannot have enough money to pay for it all at once. You will, however, pay a small portion of the price upfront with a down payment, normally between 3% and 20% of the total price, and borrow the remainder of the money to be repaid over time.
The rest of the money, on the other hand, maybe worth hundreds of thousands of dollars, and most people don’t make anywhere near that much a year. As a result, you’ll accept that the property you’re buying will act as collateral for the loan as part of the loan agreement. If you stop making payments, the lender will repossess the house, evict you, and sell the property used as collateral (in this case, the home) to recoup the funds they lent you that you were unable to repay.
A lien is placed on your property by the lender to protect this right. They (usually) only lend if you have a strong loan-to-value (LTV) ratio, which is an amount that reflects the risk that the lender will take in granting someone a secured loan, such as a mortgage, to increase their chances of recouping the money that they lend. The lender calculates the ratio by dividing the loan sum by the home’s value and multiplying the result by 100 to get a percentage. An LTV ratio of 80% or less is considered desirable by lenders.
How Foreclosures Work
In most cases, foreclosure is a lengthy procedure. You are unlikely to be evicted if you miss one payment by a few days or weeks. However, you could face late payments of as little as 10 to 15 days if you don’t pay on time. 8 That’s why, whether you’ve hit a rough patch or plan to in the foreseeable future, you should contact your lender as soon as possible. It may not be too late to escape foreclosure.
The foreclosure process differs from lender to lender, and state laws differ; however, the explanation below gives you an idea of what you may encounter. At the very least, the whole procedure could take several months.
The notices begin. As soon as you miss one payment, you can begin to obtain communications, which could include a notice of intent to proceed with the foreclosure process. Lenders typically begin foreclosure proceedings three to six months after the first missed mortgage payment. You can receive a “Demand Letter” or “Notice to Accelerate” demanding payment within 30 days if you have missed payments for three months. If you have not made the payment by the end of the fourth month, several lenders will deem your loan to be in default and will refer you to the lender’s attorney. This is where things start to get serious.
To keep informed, read all of your notices and agreements carefully and consult an attorney or a Housing and Urban Development (HUD) housing counselor.
Consequences of a Foreclosure
President Joe Biden announced that the federally sponsored mortgage foreclosure moratorium would be extended until the end of June. The foreclosure moratorium was supposed to end on March 31. According to a White House release, the move is part of a concerted initiative by the Departments of Housing and Urban Development, Veterans Affairs, and Agriculture to “deliver urgent relief for American families bearing the brunt of the COVID-19 crisis.”
Today, one out of every five tenants is behind on their payments, and more than ten million homeowners have defaulted on their mortgages. According to the White House press release, people of color face even more difficulty and are more likely to have deferred or skipped payments, placing them at risk of eviction and foreclosure.
According to the White House, the move “builds on measures the President took on Day One to expand foreclosure moratoriums for federally insured mortgages,” and it “bars home foreclosures, enables postponed mortgage payments, and provides six months of extended mortgage forbearance for all who enroll by June 30.”
For three months, the Federal Housing Finance Agency (FHFA) extended forbearance for Fannie Mae and Freddie Mac-backed borrowers.
According to the Biden administration’s Fact Sheet, which details the terms of this initiative, these concerted measures will cover 70% of existing single-family home mortgages.
Both the departments and the administration have released statements expressing their solidarity and a willingness to provide immediate relief to renters, help hard-hit communities of color, and establish a centralized housing assistance resource (the Consumer Financial Protection Bureau will house these resources).
According to a press release from HUD, the Office of Public and Indian Housing plans to announce similar relief for Native American and Native Hawaiian homeowners who received assistance through the Section 184 Indian Home Loan Guarantee Program and Section 184A Native Hawaiian Housing Loan Guarantee Program.
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