The Definition of Foreclosure: Simplified
Foreclosure can be scary for homeowners, bringing about fears of losing your home and enduring financial hardship. Knowing what a foreclosed home is, what causes foreclosure, and the implications of foreclosure is essential for all homeowners.
An increase in foreclosures can be a sign of problems in the housing market. Many homeowners have a significant amount of their finances tied to their mortgage, so increasing foreclosures is concerning.
Foreclosure activity in the US has surged to its highest level since the pandemic began. This is a clear sign of the financial strain many homeowners are under. Governments gradually rolled back mortgage forbearance and foreclosure postponements in 2021 and 2022. These rollbacks have exposed many households to financial challenges in the post-pandemic economy.
This article provides some financial education and simplifies what foreclosure is, what can cause it, and some of its impacts.
Table of Contents
- What Does Foreclosure Mean?
- Causes of Foreclosure
- Impact of Foreclosure on Homeowners
- Foreclosure Resources
- Foreclosure Assistance
The legal process of foreclosure helps mortgage lenders recover money owed on a mortgage loan that has fallen behind. A lender starts the process so they can take ownership of the mortgaged property and sell it. The process usually starts the process when the borrower/homeowner falls behind on mortgage payments.
Several different types of companies and groups can initiate a foreclosure. Apart from banks and mortgage companies, homeowners' associations (HOA) can start a foreclosure when a member is behind on HOA fees. The IRS or local tax department can also start a foreclosure when the property owner is behind on taxes.
The basis of foreclosure comes from a mortgage or deed of trust contract. These agreements let lenders use the property as collateral if the borrower falls behind on monthly mortgage payments. Generally speaking, this begins when the borrower misses at least one payment. When this happens, the lender sends a missed-payment notice to say they haven't received payment as expected.
The follow-up to a missed-payment notice is a demand letter. A demand letter is more serious, but some lenders might still be willing to make payment arrangements.
After 90 days of missed payments, the lender sends a notice of default and hands the loan to their foreclosure department.
The borrower typically has another 30 days, known as the reinstatement period, to settle the payments and reinstate the loan.
If the homeowner hasn't caught up on their missed payments after this, the lender will initiate the foreclosure process. Here's a rough recap of that timeline:
- Day 1: Monthly statement issued.
- Day 30 (1st missed payment). Lender sends missed-payment notice.
- Day 60 (2nd missed payment). Lender sends demand letter.
- Day 90 (3rd missed payment). Lender sends a notice of default to the borrower and transfers the loan to their foreclosure department.
- Days 91-120: Reinstatement period, when the borrower can reinstate the loan if they catch up on payments. (Note: not all jurisdictions and/or lenders will provide reinstatement periods!)
Colorado's foreclosure process is primarily nonjudicial. This means lenders usually don't have to go through courts to foreclose on a property unless the homeowners sue.
However, Colorado has specific requirements and protections in place for homeowners. For example, the lender must give the homeowner a "Rule 120" notice before starting a foreclosure. A Rule 120 notice informs homeowners of their rights and the impending foreclosure action. This notice gives homeowners an opportunity to catch up on payments ("cure the default") and potentially avoid foreclosure.
Colorado law also mandates a "public trustee" system, where a neutral third party oversees the foreclosure process. The third party handles the foreclosure sale and informs everyone about the process, ensuring fairness and transparency.
Utah and Arizona are Colorado's closest neighbors who prefer a nonjudicial foreclosure process. In these states, the process can take as little as 60 days.
Nebraska, Kansas, and New Mexico mostly use a judicial process for their foreclosure processes. The lender must start with a lawsuit, and the borrower has until the sale date to settle payments. The process in these states can span a few months to a year.
Knowing how foreclosure works in your jurisdiction is important, and getting help from a professional is an important first step.
There are a lot of factors that can lead to foreclosure, but some are more common than others. Rising unemployment rates, economic downturns, and changes in foreclosure protection laws are all factors in rising foreclosure rates.
Apart from the causes above, other common causes of foreclosure include:
- Adjustable Rate Mortgages (ARMs): These types of mortgages have interest rates that can change over time, leading to increased monthly payments. Homeowners who don't anticipate or understand these changes can find themselves unable to afford their new payments, leading to foreclosure.
- Medical Issues: When medical issues cause homeowners to miss work, they can lose the income they need to pay their mortgage. Medical bills can quickly accumulate, forcing homeowners to choose between paying for health or their home.
- Divorce: A divorce can result in a reduced income for one or both parties. The lost income can make it hard or impossible to keep up with mortgage payments. This is especially true if someone stays in the home and can't afford to pay the mortgage on their own.
- Job Loss: Individual job losses can occur for various reasons, including company downsizing or personal issues. Losing a primary source of income can make it nearly impossible to keep up with mortgage payments.
- Property Tax Increases: Property taxes can also increase significantly in areas where property values are rising rapidly. Homeowners who don't anticipate or budget for these increases might be unable to cover the higher costs.
- Unexpected Major Home Repairs: Damage or wear and tear can lead to homes needing major repairs and renovations. Without savings or insurance coverage, paying for the repairs can cause homeowners to fall behind on mortgage payments.
- Predatory Lending Practices: Some lenders offer loans that are harder to repay than they appear. For example, these loans might hide fees, high-interest rates, and other terms in the fine print. Borrowers who don't fully understand their loan terms or are victims of deceptive lending practices can end up in foreclosure.
- "Underwater" Mortgage: When property value decreases, some homeowners may stop paying and return the property to the lender.
Understanding the causes of foreclosure can help homeowners prepare for it, and potentially avoid it altogether.
Foreclosure can hit homeowners hard. Losing the place where you live and have invested so much money is extremely difficult. Foreclosure also greatly impacts credit scores, making it hard to get loans or credit cards later on. Plus, the interest rates might be higher when you can get loans.
A foreclosure can stay on a credit report for up to seven years, making it challenging to bounce back financially.
The emotional side of foreclosure is heavy, too. Homeowners dealing with foreclosure often feel shame, guilt, and worry. Not knowing where they'll live next and the negative views around foreclosure can bring mental health issues.
Because of these and other impacts, we've compiled some resources to help homeowners looking at foreclosure.
- Federal Housing Administration (FHA): The FHA helps homeowners avoid foreclosure. They offer ways to postpone payments, modify loan terms, and provide compensation for missed payments.
- Home Affordable Modification Program (HAMP): HAMP helps homeowners change their mortgage terms to make their payments more manageable.
- Hardest Hit Fund (HHF): This fund assists states that experienced the most severe housing troubles and economic downturns.
- NeighborWorks America: This group offers counseling and help for homeowners to prevent foreclosure.
- Homeownership Preservation Foundation (HPF): HPF gives free, private financial advice and counseling to homeowners facing foreclosure.
- National Foundation for Credit Counseling (NFCC): NFCC provides counseling and education to help homeowners understand their choices and make smart decisions.
Many local and state governments have their own programs to help homeowners facing foreclosure. These might include hotlines for foreclosure prevention, legal help, and financial counseling. Additionally, Best CS Homes provides foreclosure counseling and assistance to homeowners in the Colorado Springs area.
Foreclosure can be an unsettling term for homeowners, hinting at the potential loss of their cherished home. However, it's essential to remember that foreclosure is a process, not a final verdict on one's financial capabilities.
Various factors, from economic downturns to personal challenges like medical emergencies or job loss, can lead to foreclosure. Foreclosure happens to people from all walks of life. It's important to try viewing it as a setback today that may lead to a stepping stone for tomorrow.
Many homeowners bounce back from foreclosure and are able to learn, grow, and rebuild. Remember that every end can be a new beginning in today's dynamic world with its ever-evolving challenges and opportunities.
We Can Help You Avoid Foreclosure!
In the face of the distressing threat of foreclosure, there is still hope to secure the vital assistance you require. Our unwavering commitment revolves around crafting tailored solutions for your specific circumstances. Take charge of preserving your home. Refuse to allow foreclosure to crush your dreams; take action immediately to ensure a brighter future. We possess the expertise to steer you on the road to financial security and a tranquil state of mind.