You’ve probably been hearing a lot about mortgage foreclosures in recent months due to the pandemic. Mortgage foreclosure is a tool that lenders use to avoid financial losses when borrowers can no longer make their mortgage payments. When a lender forecloses on your home, you face eviction from the home, and your credit takes a significant hit.
If you’re struggling to pay your mortgage, there are options available to help stall foreclosure or avoid it altogether. You’ll need to understand the ins and outs of the mortgage foreclosure process and the foreclosure meaning before you can take advantage of these options.
For starters, it’s important to communicate with your lender before missing any payments so you can learn what options are available to you. If you can’t pay your mortgage due to the pandemic, you may have additional programs at your disposal. Here’s what you need to know about mortgage foreclosure.
What is a mortgage foreclosure?
What is foreclosure? Mortgage foreclosure is the legal process of a lender taking possession of someone’s home due to nonpayment of the mortgage loan on the home. Mortgage lenders foreclose on someone’s home when they’ve stopped making payments on their home loan. Doing this allows the lender to recover some or all of their financial losses due to the nonpayment.
When borrowers take out a mortgage, they agree to put up the home as collateral in case of non-payment. This effectively places a lien on the property that gives lenders the right to seize the property in the event the borrower defaults on the loan.
Foreclosure can be a lengthy process, and the laws surrounding it vary by state. Don’t expect to receive a foreclosure notice after just one late payment. If you fail to make your payments for many months, however, the bank is likely to take action.
Before the foreclosure process starts, you’ll receive late fees and late payment notices warning you to get current on your loan. Foreclosures can be either judicial or nonjudicial, and it will heavily depend on the state in which you live. A judicial foreclosure requires the lender to go through the court to seize the home, while a nonjudicial foreclosure doesn’t require this step.
Foreclosures come with steep consequences. First, you’ll be evicted from the home, as you will no longer be the owner — the lender will. You’ll also incur long-term damage to your credit. A foreclosure stays on your credit report for seven years and severely impacts your credit score during that time. You’ll have a hard time borrowing money, getting a credit card or possibly even renting an apartment with a foreclosure on your credit.
COVID’s effect on foreclosures and the CARES Act, explained
When the COVID-19 pandemic began, it had major impacts on both public health and the economy. As a result of the business closures, millions of people have faced job loss and many have struggled to make their monthly payments.
In response to the financial upheaval, some federal, state and local governments have put foreclosure moratoriums into place to prevent people from losing their homes. The most notable foreclosure protections came from the federal Coronavirus Aid, Relief and Economic Security (CARES) Act, which was passed in late March.
Among other things, the CARES Act created a 60-day moratorium for foreclosures on federally-backed mortgage loans. Federally-backed loans include FHA loans, VA loans, FHFA loans and USDA loans. The moratorium was later extended to apply through the end of 2020.
The CARES Act also allows eligible borrowers to seek a forbearance of up to 360 days if they cannot make their mortgage payments.
Many state governments have also implemented foreclosure bans to prevent residents from losing their homes. Some of the laws require mortgage lenders to grant forbearance to anyone facing financial hardship during the pandemic. The National Consumer Law Center has published a full list of the state housing actions related to COVID-19.
[ Read: Mortgages in Forbearance Will be Eligible for Refinance ]
How to avoid foreclosure
A foreclosure can have long-lasting impacts on your finances and other areas of your life. If you’re struggling to make your mortgage payments, foreclosure isn’t necessarily a forgone conclusion. There are steps you can take before you walk away from your mortgage.
If you worry you won’t be able to make your mortgage payment, your first step should be to call your lender. Don’t just avoid the problem. Your lender could be willing to work with you if you communicate with them before any missed payments.
Other options may include:
- Forbearance — A lender may allow a borrower facing financial hardship to pause their mortgage payments temporarily. When the forbearance ends, your lender will likely set up a payment plan for you to repay the missed payments or move them to the end of your loan term.
- Reinstatement — This process is for those who have already missed one or more loan payments. Your lender allows you to catch up on payments, including any late fees you incurred. Once you are up to date on the amount overdue, you can resume regular payments.
- Modification — A mortgage modification is an agreement between a lender and a borrower to change the loan terms. When you go through a loan modification, you and the lender decide on new monthly payments, mortgage rate, loan term, etc.
- Refinance — If you’re eligible, you might consider refinancing your loan to lower your monthly payment. When you refinance, you take out a new loan to replace your existing mortgage loan. You might refinance with the same lender or a different one. Your new loan will come with a new interest rate and payment terms.
[ Read: How to Avoid Foreclosure: Where to Get Help ]
Tips on foreclosures
If you worry you might be facing foreclosure or are already going through the process, these tips might make the process a bit easier.
Scam artists often target people in vulnerable situations, including homeowners in foreclosure. They may claim that they can stop your foreclosure in exchange for a fee. They might have you direct your mortgage payments to them, claiming they’ll make up the rest. They then pocket your payments, and the foreclosure moves forward.
Communicate early and often.
Your lender is far more likely to cooperate with your situation if you haven’t missed any payments yet. Contact your lender as soon as you know you can’t make a full payment, and keep them updated on the situation regularly.
Know your rights.
Your rights during the foreclosure process vary depending on the state in which you live. You can reach out to an attorney or housing counselor to learn about the foreclosure process and what your options are. The U.S. Department of Housing and Urban Development offers free or low-cost housing counseling nationwide.
Work on rebuilding your credit.
Foreclosure can take a significant toll on your credit and prevent you from getting a loan, opening a credit card or even renting an apartment. Start the process of rebuilding your credit as soon as possible.
[ Read: Tips for Buying a Foreclosure ]
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