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Home is more than a roof over your head. It is where you make plans, invite friends for a visit, and express yourself aesthetically. If you have a mortgage, that home is also important to the lender as the collateral securing the loan, and therefore the one asset the lender can repossess if you miss too many payments.
What are foreclosure and repossession?
It's common to see the terms "foreclosure" and "repossession" used interchangeably, but this is not accurate. Foreclosure and repossession are like cousins who work together but do different jobs. When a homeowner stops making payments, the mortgage lender takes action to recoup as much of the investment as possible. That process -- from initial contact with the homeowner to reselling the property -- falls under the umbrella of foreclosure.
Once the lender has taken ownership of the home or resold it to a third party, repossession occurs. The previous homeowner must vacate the property to allow the new owners access. The repossession process can be as simple as the former owners moving out by the date requested by their lender, or it can be messy. If the previous owners have not vacated by the date requested, law enforcement may escort them out of the house. Anything left in the home, including furnishings and personal items, become the new owner's property, and can be disposed of any way the new owner sees fit.
Today, we focus on the steps that lead to repossession, and how to avoid it. As you will see, foreclosure slowly leads to eventual repossession, which gives you time to look for alternative solutions.
1. Contacted by the lender
Typically, if you are 120 days late on your mortgage payments, your lender will contact you (as they are legally obligated to do) to let you know where your account stands and how to prevent foreclosure.
What you can do: The lender will give you a short time to catch up on the amount due. If you are unable to pay, the smart move is to work with your lender. Explain your situation and ask for help in coming up with a workable solution. That solution may involve loan modification, payment forbearance, or slowly catching up on missed payments. If your financial troubles are due to COVID-19, your lender can help you figure out which housing assistance programs may work.
As you work with your lender, also contact the Homeownership Preservation Foundation (HPF). HPF is a nonprofit organization that offers free advice to homeowners at risk of foreclosure, and is well-versed in the ins and outs of stopping the process before it reaches repossession.
2. The lender acts
Once the lender decides there will be no future payments, the situation moves to foreclosure. The lender's steps vary by state, and by whether your state requires a "judicial" or "nonjudicial" foreclosure. In either case, it nearly always leads to selling the home at auction.
What you can do: Speak with a certified credit counselor about your remaining options. Organizations like the National Foundation for Credit Counseling (NFCC) are experts in everything from reverse mortgages to bankruptcy, and can provide a menu of ideas that fit your circumstances.
You can also ask your lender to take part in a short sale. A short sale occurs when the lender agrees to sell the property to another party for less than you owe. The difference between the amount the third party pays and the amount owed is forgiven in some states, while you are required to pay it in others.
Finally, bankruptcy is an option, although it is a scar that will remain on your credit report for at least seven years. Despite the damage to your credit, bankruptcy can postpone foreclosure and repossession by months, or even help you keep your home. Once Chapter 7 or Chapter 13 is filed, the court issues an order called an "automatic stay." This order is sent to your creditors and directs them to cease collection activities immediately.
If you file a Chapter 7 bankruptcy, you usually have three to four months to prepare for what the lender will do next -- sell the property.
Filing Chapter 13 bankruptcy is more complicated, but may be the best option for staying in the home. The primary requirement is that you earn enough money to meet your current mortgage payment and pay off anything in arrears.
It works like this: Your attorney proposes a repayment plan -- typically lasting five years -- that allows you to make your monthly mortgage payment while slowly repaying missed payments and fees. Depending on your home's current value, Chapter 13 can also help rid you of second or third mortgages.
3. A notice of sale is sent
A notice of foreclosure sale will be mailed to your home, informing you of the upcoming auction and giving you the date by which you must vacate the property.
What you can do: Unless you have found a way to pay your mortgage or have filed for Chapter 13 bankruptcy protection, your best bet is to make preparations to move.
4. Repossession takes place
The lender considers the home its property and expects you to have vacated it.
What you can do: Move out before the date listed on the notice of sale. If you are unwilling to leave the home by the date provided, an officer of the court will be sent to escort you, and you may be billed for that.
5. A public sale is held
Typically, repossessed homes are sold at auction to the highest bidder.
What you can do: Unless you or someone you know has the funds to purchase the home through auction, stay away. Being there will only cause pain and frustration. The idea is to move on in the healthiest possible way.
6. You learn the outcome
The lender will send you a notice regarding the auction. If the home did not sell, it becomes a real estate owned (REO) property. This means that the lender officially becomes the owner until, usually, it's sold to someone else. Whether the home becomes an REO or is purchased at auction for less than you owed, you are legally responsible for the difference. For example, if you owed $200,000, but a buyer paid $185,000, you would be liable for the $15,000 shortfall.
What you can do: If you opted not to work with a bankruptcy attorney earlier in the process, revisit that idea. Once you are on the hook for the amount lost by the lender, bankruptcy is one of the few ways to release that debt.
Having your home repossessed can be jarring, but there is no reason to let it be the worst experience of your life. You can only do what you can do. Like every other significant financial incident, it is possible to recover from foreclosure and repossession. All it takes is time and a good plan.
And if your financial troubles are due to COVID-19, be sure to take advantage of all lifelines currently available.
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