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    What is Foreclosure?


    Foreclosure is a common term that makes its appearance in everything from TV and movies to conversations at work. It’s probably even lurking in your mind, somewhere amongst your worst fears. But what is foreclosure? It’s a legal process in which a lender seeks to recover an amount owed by becoming the owner of a mortgaged property. 

    Keep reading to learn more about how this process works, what the alternatives are, and what you need to be aware of. 

    How Does Foreclosure Work?

    When you default on a loan, a variety of consequences can be triggered. Your missed payments are reported to the three major credit bureaus, which in turn lowers your credit score. You may also be subjected to late payment fees and other fines. If you took out a secured loan, collateral might be collected. 

    The definition of foreclosure actually refers to an entire process, and not necessarily one event. When you default on your monthly mortgage payments, typically a specific number of them, your home may be confiscated. Other factors may contribute, the details of which are outlined in your mortgage agreement. Once the payments are missed, the lender will send a demand letter, and after 90 days of missed payments, a notice of default is issued. 

    While these notifications are serious, you’ll still have a little bit of time (about 90 days to be exact) to try to get payments reinstated. The lender may be willing to work with you, so be sure to explore all options and do what you can to get back on track.

    Filing For Foreclosure

    Foreclosure is actually the last step in a longer process known as pre-foreclosure. This is because the lender is usually trying to work with the borrower by offering different alternatives to help avoid such a drastic measure. This measure can actually have bad consequences for both parties, so every possible attempt should be made to remedy the situation and find some path to mediation. 

    However, if no alternative is available, then the process will begin. In the next steps, the lender must post a public notice regarding the homeowner’s current status and available options. This notice must also include a proposed timeline and details of the process for selling the property.

    From there, the process can take several years to complete. 

    Foreclosure State By State 

    It’s important to note that foreclosure can differ from state to state. There are also two different types; judicial and non-judicial. 

    In 22 states, the judicial process is how things will proceed. The lender is obligated to go through the court system to obtain permission to confiscate a borrower’s home. The lender must also prove delinquency. 

    Once approved, the bank becomes the owner of the property. A local sheriff then sells the property via an auction to the highest bidder. This is done to get some part of what the bank is owed on the property. States that follow this procedure include New York, Florida, Oklahoma, New Mexico, Maine, New Jersey, and others.

    The other 28 states follow a non-judicial procedure. As the name suggests, this process doesn’t necessarily mean this is done through the courts. Thus, it tends to move along more quickly. States that adhere to this process include Texas, California, Colorado, North Carolina, and others.

    Advantages And Disadvantages Of Foreclosure 

    There are not too many advantages of loan foreclosure, but some might include:

    • A fresh start. If you’re facing losing your home then you’ve gotten yourself into a dark financial situation. You can look at this as an opportunity to restart 
    • Learn better financial health practices. Losing your home will affect your credit history and finances, so you’ll need to reevaluate your approach to your budget and finances and learn better practices 

    Disadvantages include:

    • You lose your home
    • Credit fallout and backlash 
    • It can be harder to get a house in the future
    • After the process is finished, your lender will probably forgive your debt, but that doesn’t mean the IRS has forgotten about it. Therefore, you’ll likely still owe taxes 

    Long-Term Consequences 

    This procedure will appear on your credit report within a month or two months. Unfortunately, the record of losing your home will stay on your credit report for the next seven years. This can be difficult if you want to rent a home, lease a car, or secure good terms for a loan. After seven years, it’s deleted from your report. 

    Alternatives To Foreclosure 

    Try working with your lender or a financial advisor to help you fully understand your alternatives. Confiscating a property tends to be a bad deal for everyone involved, so it’s in everyone’s interest to find a solution.

    [H2] Bottom Line

    Foreclosure is a serious legal process that can have long-lasting effects on your life. To avoid it, make smart financial decisions and reach out if you see things are getting out of control. With smart financial practices, you can avoid disaster and keep your home.