A mortgage lender usually has two options when a borrower cannot meet the repayment obligations on their home loan. It can foreclose on the property (or otherwise force a sale), or the borrower can agree to modify the loan with a different repayment schedule, interest rate, or principal amount. The difference between these options is that the borrower remains on the property as a tenant once the modification is complete, while a foreclosure involves sending the borrower off the property. From the lender's perspective, foreclosure is slow and expensive. Thus, the lender will usually be just as motivated as the borrower to see that the loan is paid on time and foreclosure does not become necessary.
Understanding Foreclosure Law helps to consider the nature of a mortgage. Most people think of a mortgage as a loan, and that is part of it. Bank loans are used to finance the purchase of a home or to borrow money for any purpose from a bank or other lender. The borrower signs a document (called a mortgage) that gives the lender a security interest in the home.
In other words, the home becomes collateral for the loan.
If the borrower stops making the payments, the lender can foreclose on the collateral (i.e., the house).
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When borrowers stop paying their loans on time, banks will foreclose. This means the bank seizes the property and evicts the borrower from home. For borrowers who have the means and the desire to stop the foreclosure process, several options are available to allow them to retain possession.
Start by remembering that the foreclosure process begins long before the borrower's first missed payment. If the borrower has suddenly fallen on hard times and cannot make their payment, they may still be able to stop the foreclosure process.
For example, if they send a check for the entire balance of the loan before the time the bank sells the home at a foreclosure sale, they purchase the home back themselves. It may also be possible to pay only the missed payments and any penalties, reinstating the defaulted loan and stopping the foreclosure.
Forbearance allows you to temporarily not make loan payments. This can be useful in situations such as financial hardship or losing your job. But, forbearance does not reduce the debt owed, so it is not a long-term solution.
Modification is when a lender changes the terms of a loan to make it more affordable for the borrower. Several government programs, such as the federal Home Affordable Modification Program (HAMP), help borrowers by subsidizing modifications that meet certain preconditions.
Everything is not lost for those who have to surrender their home (they have options!). The real estate market generally appreciates at a greater rate than inflation each year, so many can walk away with pockets full of cashand thus, become Real Estate Millionaires. Yes, even in these rough economic times, homeowners are cashing in big on their homes. In many situations, borrowers are not ready to own single-family homes. This can be due to many things, including health issues, job relocation, or inheritance.
In these cases, many families find the best option is to turn the homeownership to the lender and pay the remainder of their loan balance as part of a deed in place of foreclosure. This allows the homeowner to skip the last stage of the foreclosure process and move on with less debt and an improved credit score.
Here are a few quick tips for avoiding default judgment and getting the results you want:
- Watch extra closely for rigid patterns. Learn to spot the warning signs of default judgment creeping into your work, such as false logic, cherry-picking, and bias.
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- Repeat testing with complementary circumstances.
A deed in place of foreclosure allows a homeowner to voluntarily hand over ownership of their property to pay off a home loan and avoid foreclosure. It avoids many negative aspects of foreclosure but can present its pitfalls. A deficiency judgment occurs when the lender has the option and chooses to come after the borrower for any remaining balance. A poor judgment can be risky if the taxpayer is not fully aware of their rights relative to this liability.
Of course, mortgage lenders take a security interest, or a second or third mortgage, in a piece of property when they give the buyer a mortgage loan. First mortgages are loans made directly by the bank. Second mortgages are bank loans made through a third party, usually a mortgage broker. Third-mortgage home loans have the lowest rates but are also the hardest to find because lenders view them as riskier than first-mortgage home loans.
A personal guarantee protects the borrower's lender by allowing them to take the borrower's home or other property if the borrower defaults on the loan. This reduces the risk to the lender if the borrower does not pay. In states where the practice is permitted, lenders often require borrowers to sign personal guarantees to cover the portion of the underlying loan that is not covered by the home.
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