Foreclosure and Refinancing Overview

Foreclosure is the process by which a homeowner relinquishes legal rights to a property because of failure to meet mortgage payments in a timely manner. Technically, foreclosure is a civil lawsuit in which a financial institution that holds the lien on the property seeks a court order to sell it in order to satisfy the debt. If a court finds in favor of the lender, the property can be sold at auction to pay the delinquent mortgage debt.


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Mortgages are secured loans. When purchasing a home, buyers must sign a stack of papers, one of which is the deed of trust, which essentially puts a lien on the property. This type of loan is different from those the smaller loans given by credit cards, which are unsecured by collateral or property. When individuals default on a mortgage, lenders stand to lose money, but can often recover a large portion of the debt by seizing and selling the property in question.

Foreclosure does not occur overnight, but is a lengthy legal process that varies from state to state where a number of specific steps must be followed by both the lender and the mortgagee. The process cannot begin, however, until the borrower fails to make mortgage payments. Reasons for missing payments usually stem from financial difficulties such as the loss of a job or divorce. Some borrowers choose to stop making payments because the property is worth less than the mortgage, a term commonly known as underwater.

When three to six months of missed payments have occurred, the lender files a notice of default, which basically means a lawsuit is pending. This is an official notice to let borrowers know that they are in danger of losing all rights to the property. After receiving a notice of default, a grace period ensues where borrowers can work out a deal with lenders to pay the specified amount or work out a short sale. If the default is not paid, foreclosure follows. The lender then sets a date for the property to be sold at auction to satisfy the defaulted borrower’s lien.

DOES REFINANCING STOP FORECLOSURE?

If you’re facing foreclosure, one way to stop it is by refinancing. This process will pay off the existing mortgage, thus wiping out the past due debt. Any court hearings scheduled for the foreclosure will be cancelled, and the foreclosure will never go through. Not everyone who is facing foreclosure will be able to qualify for a new loan. But for anyone who is in the foreclosure process, it’s certainly worth a try.

Foreclosures are not matters taken lightly by lenders. They won’t begin foreclosure proceedings until a property owner has missed several payments. When attempting to refinance, the reasons someone got behind on their payments is important. Did someone lose a job, but now has obtained a new one? Did a divorce or death of a spouse cause a disruption in income? Have interest rates dropped, so that the new payment would be less? Has the homeowner handled their other debt responsibly during a difficult time? These are all circumstances that a lender will consider when qualifying someone for a new loan.

The best bet for attempting to refinance when in foreclosure is to start with the lender who already holds the loan. Contact them and express your intention to remain in your house and ask about applying for a refinance. In recent years there have been government-sponsored programs like HARP or HAMP that allowed lenders some leeway in granting new credit to someone who might not otherwise qualify. Some lenders even have their own in-house programs, because they’d much rather keep someone paying on their mortgage than go to court, which is costly for them.

When attempting to refinance while in the foreclosure process it’s important for a homeowner to be on top of deadlines. A new mortgage must be in place, so that the old mortgage is paid off, before the final foreclosure hearing. A homeowner must be diligent in making sure to quickly respond to the new lender with any documentation they request. Follow up regularly with the loan processor to make sure the new loan application is progressing. If the refinance can’t be completed before the foreclosure hearing, the lender can request a delay. But a homeowner would be wise to follow up with the court and make sure this is processed in a timely manner. With a little due diligence it’s possible that refinancing can stop a foreclosure.

 

Gina Wilson

Another post from Gina Wilson – Credit & Loans Specialist Blogger.