Tips and Traps When Negotiating Real Estate: What Is the Foreclosure Procedure?

What Is the Foreclosure Procedure?

The foreclosure process varies from state to state. But in general it always involves a period of time during which the borrower can make up back payments and correct any default. {Default is a tech­nical term that means that the borrower has failed to meet, or has defaulted, on the obligations he or she has under the mortgage.) After that time period, there is either a judicial foreclosure in which the lender goes to court to secure title to the borrower’s home, or a trust deed sale in which the lender uses an independent third party, a trustee, to gain title to the property without going to court. Most states today use the trust deed method because of the speed (as little time as 60 days) and the reduced cost to the lender.

That’s the procedure. What’s important to realize is that if you’re late even one month on your mortgage payment, most lenders will report that to a credit agency and it will appear on your credit record as a late payment. While one late payment usually won’t dam­ age your credit too badly (we’ll see an exception in a moment), a series of late payments will.

If you stop making payments altogether, and the lender goes through the entire foreclosure process, a report of that will also make its way to a credit agency. The importance of a foreclosure on a credit record cannot be underemphasized. Generally speaking, no institutional lender will offer another mortgage to anyone who has had a foreclosure on their record for many years to come.

TRAP

Mortgage lenders are highly sensitive to late mortgage payments. To get the best loans today—generally speaking, Fannie Mae or Freddie Mac underwritten financing (called “conforming” loans)—you cannot have any blemishes on your credit, not even one late mortgage payment.

TIP

Whatever you do, if you ever plan to buy another home, don’t let your house go to foreclosure. Borrow to make that payment, sell the property at a loss, but don’t let them foreclose. The effect on your credit can be devastating for years to come.