How The California Foreclosure Process Works
When a home owner is unable to make their mortgage payments, their house may go into foreclosure. Foreclosure is the legal process that allows a lender to take ownership of a home and sell it at auction in order to satisfy the debts owed by the borrower. Foreclosures can have a profound and lasting impact including a 200 to 300 point drop in credit score that stays on your credit report for up to seven years, difficulty passing credit checks for future employment, inability to obtain financing and approval for loans, credit cards, and rental applications, and even possible homelessness. For homeowners facing foreclosure, the process can be both confusing and stressful. The chart below provides an overview of the timeline and process foreclosures follow in the state of California.
Options to Avoid Foreclosure
The proposition of foreclosure is scary, but do homeowners have any ability to avoid foreclosure or mitigate its impact? Fortunately, the answer is “yes!” Here are a few options that are available:
Sell The Home
Even though the homeowner is in default, they still own the property and have the right to sell it. Selling is a good option when the money the homeowner owes on all their mortgages is equal to or below the market value of their house. Owner’s can sell their property three different ways: (1) by themselves by listing it For Sale by Owner (also referred to as “FSBO”), (2) through a Realtor; or (3) to a real estate solutions firm such as I Buy Real Estate, LLC.
Selling a house For Sale By Owner can be very stressful on the homeowner. It takes time for the homeowner to place ads online or in the newspaper and they have to be there every time someone wants to see the house. They are also responsible for all marketing expenses including advertising and signage. If the owner is already under financial distress, taking on additional marketing expenses is not very helpful.
Selling through a Realtor can be less stressful since Realtors pay for all marketing expenses. This benefit, however, doesn’t come free. That’s where the Realtor commission comes in. When the house is sold, a certain percentage is taken from the seller’s proceeds in order to pay the Realtor. If the house doesn’t sell for a high enough price, once the Realtor commission is paid, the homeowner (who is already unable to make their mortgage payment) then has to bring cash to the closing table in order to satisfy what’s owed to the lender.
The third, and most popular option, is to utilize a real estate solutions firm such as I Buy Real Estate, LLC. Firms such as these can often make all cash offers. This eliminates the stress associated with marketing and showing the home. It also allows the home to sell quickly, well before it goes up for auction. The speed of the transaction helps homeowners get back on their feet quickly while significantly reducing the impact to their credit score.
Setup a Repayment Plan
There are two common types of repayment plans for someone in foreclosure – Loan Modification and Forbearance.
A loan modification permanently changes one or more terms of the homeowner’s loan. For example, the interest rate may be lowered and permanently changed so that the homeowner has a lower payment and better chance of being able to make their payments. There could also be an extension on the payoff terms of the loan. A re-amortization of the loan takes place and the new payoff schedule is put into place. When this happens, the loan is reinstated and the payment is one that the borrower can afford. This gives the homeowner a better chance of being able to make their mortgage payments and keep their house.
A forbearance agreement is beneficial for borrowers who have had temporary financial difficulty rather than long-term financial difficulty. This is because a forbearance agreement has the borrower bring the loan current by rolling missed payments and late fees on top of their current mortgage payment, typically increasing their payment to an even higher amount than before. This isn’t a good option for most people because it increases the borrower’s monthly payment.
Deed-in-Lieu of Foreclosure
A deed-in-lieu of foreclosure is similar to a voluntary foreclosure. The borrower essentially turns over the property and gives the keys back to the bank so that the lender stops the foreclosure process. The homeowner signs the house back over to the bank by signing a deed and the lender marks the note as “paid.” The advantage to a deed-in-lieu is that neither the lender nor the borrower has to go through the stress and monetary drain of a full foreclosure. The bank saves a lot of time and money because they get the house back quickly and can put it back on the market to sell. The downside for the borrower is that this is still considered a foreclosure and will affect their credit in the same way that a regular foreclosure would.
A partial claim is only an option available to FHA (Federal Housing Administration) or HUD (Housing and Urban Development) loans. FHA loans make it easier for people to qualify for a loan because FHA insures the loan against default. FHA guarantees that the lender won’t have to write off the loan if the buyer defaults because FHA will pay. A partial claim is an interest free loan guaranteed by HUD and given to homeowners who are in default to pay off the arrears and reinstate their delinquent loan. Once the first mortgage is paid off, or when the property is sold, the partial claim loan must be repaid. Once the partial claim is complete, the borrower is no longer at risk of foreclosure or losing their home.
Short sales are an option for homeowners that owe more on their home than their property is worth. With short sales, the homeowner negotiates with the lender and asks them to stop the foreclosure process in exchange for accepting less than the amount owed to them. Many people wonder why a bank would agree to accept less than what is owed to them. The reason is because banks are in the business of lending money, not owning property. Banks are only allowed to have a certain amount of property on their books at any given time. When a bank owns a property, they incur additional expenses associated with holding and selling the property. Short sales allow a bank to recover a portion of what is owed to them. In most cases, this amount (even though it’s less than what is owed) is going to be more than the bank would receive if it foreclosed the property and tried to sell it on their own.
Short sales come with stipulations though. One of these stipulations is that short sales must be an arms-length transaction. This means that whoever is buying the house cannot be related to the homeowner in foreclosure. The house, after it’s sold, cannot be leased back to the homeowner who was in foreclosure and the homeowner who was in foreclosure cannot stay in the house for any reason. Despite these stipulations, short sales have less of an impact to a homeowner’s credit score than foreclosures do.
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