The Foreclosure Process

In these tough times, money can be tight. So tight, in fact, that many homeowners are unable to make their monthly mortgage payments. When homeowners fail to make their monthly payments, they are in default under their loan obligations. Once a homeowner is in default, the lender, usually a bank, can decide to foreclose upon your home.

What is a foreclosure? How does a foreclosure work? What is the foreclosure process?

A foreclosure is a legal process that allows a lender to recover the amounts owed by selling or taking ownership of a property that was used as security, or collateral, for a loan. Typically, a homeowner/borrower misses one or more monthly payments, and the loan is then considered in default. Once a loan is in default, there are five general options available to cure the default under the loan (there may be other options, but the main ones are as follows):

  1. The homeowner/borrower reinstates the loan. This simply means that the homeowner/borrower pays the delinquent amount, including any late fees or charges associated with the default. Even though some letters or a formal Notice of Default from the lender may say that the loan has been “accelerated” (i.e. the entire amount is now due), typically, California foreclosure laws allow you to reinstate the loan (by paying only the delinquent amount and related charges) and then resume making the regular monthly payments.
  2. The lender agrees to a modification of your loan. Typically, when a bank agrees to modify a loan, they agree to adjust the interest rate on your loan so that you can make your monthly payments. Lately, some banks have been willing to agree to a reduction of the principal balance of your loan.
  3. The homeowner/borrower sells the property to a third party. Assuming that the property is sold for more than the amount of the loan, a sale allows the homeowner/borrower to pay off the remaining amount due under the loan. In some instances when the home is worth less than the amount of the loan, a lender may allow for a “short sale,” where a lender agrees to accept payment of any amount less than 100% of the loan amount due as full payment for the loan.
  4. The homeowner/borrower transfers ownership to the lender by a “deed in lieu of foreclosure.” The homeowner/borrower and the lender both agree that the homeowner/borrower will transfer ownership of the property to the lender and your loan will be deemed fully satisfied. Such an agreement saves both parties from dealing with the cost, expense and burden of a foreclosure. This type of agreement is often referred to as a “deed in lieu of foreclosure” or simply a “deed in lieu.”
  5. The lender starts a foreclosure process and sells the property. Under California foreclosure laws, a lender can start a foreclosure process, and then sell the property at a public auction, typically known as a “trustee’s sale.” Generally, after a property is sold in this manner, the lender who has caused the foreclosure cannot further sue the homeowner/borrower for the balance owed on the loan, if any.

If you’d like to learn more about foreclosures, whether you are being foreclosed upon or are looking to purchase a foreclosed home, feel free to contact our office to set up an appointment.

Read more about the foreclosure process, and why it might be wise to see an attorney if your home is in foreclosure.