It occurs when a borrower falls behind on their mortgage payments (either principal or interest). Depending on the conditions of the mortgage agreement, the lending institution (bank or building society) may take and sell the property.
Foreclosures are possible, but they are unfortunate. If you fail to make your mortgage payment and the lender forecloses on your home, you will have to vacate the property. A Deficiency Judgment could be sought if the value of your collateral is lower than the amount still owed on your loan. Foreclosure and Deficiency Judgment both have the potential to negatively impact future credit applications. This is why you should do everything in your power to prevent foreclosure.
Before doing anything else, contact your lender's Loss Mitigation Department if you are having trouble making payments. Give them an explanation for what's going on and be ready to dish the dirt on your finances, including your monthly income and expenditures. If you follow these three guidelines:
The following potential alternatives are available; however, eligibility is determined by your lender. A housing counseling service can also represent you in communications with your lender and advise you on your best course of action.
Mortgage Modification – If you are currently able to make your regular mortgage payment but are unable to pay off the arrears, your lender may agree to alter your mortgage. Incorporating the overdue sum into the current loan and spreading out the payments over a longer period of time is one option. If you find that you are unable to keep up with your mortgage payments at their current level, you may qualify for a mortgage modification. Your mortgage lender may agree to renegotiate the loan terms and extend the life of the loan, so reducing your monthly payments.
Pre-Foreclosure Sale – You can prevent foreclosure by selling your home before it actually goes into foreclosure for less than what's owed on your mortgage. If you meet these criteria, you may be eligible:
Deed in Lieu of Foreclosure – To avoid foreclosure, some lenders will accept a deed in lieu of foreclosure, in which the borrower voluntarily returns the property to the lender in exchange for a cancellation of the debt. It's worse than foreclosure, but at least it doesn't destroy your credit. Before consenting, the lender may stipulate a term during which the residence must be marked "For Sale." If there are already liens on the property, this may not be an option.
For FHA Loans – The FHA Insurance Fund may make a one-time payment to the lender on behalf of the borrower. The homeowner must provide evidence that they are once again in a financial position to make their entire mortgage payments on time, and additional requirements may also apply.
For VA Loans – When Applying for a VA Loan - Foreclosure prevention services and other financial aid are available from the Veterans Administration Loan Centers.
Reinstatement – If you have fallen behind on your payments but can guarantee that you will be caught up by a certain date, you may be eligible for reinstatement.
Forbearance – Forbearance entails putting off payments for a limited time with the promise that they would be brought current through another means at a later date.
Repayment Plan – If you have fallen behind on your payments but are now back on track, you may be able to get your account current by paying a small percentage of the past-due amount together with your regular monthly payments for a set number of months
Partial Claim – If you qualify, your lender may be able to assist you in obtaining a lump sum payment from the FHA Insurance Fund to bring your mortgage account current.
Resuming regular full mortgage payments may put you in the running.
If your mortgage servicer submits a Partial Claim on your behalf, HUD will pay that servicer the amount needed to make your mortgage account current. A Promissory Note will be filed against your property as a Lien until the debt is settled. When the first mortgage is paid off or the property is sold, the note must be repaid in full without interest.