Mortage Basics
Foreclosure
It’s when a homeowner is unable to make principal and/or interest payments on their mortgage. The lender, a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.
Unfortunately, Foreclosure can happen. By missing a mortgage payment, your lender has the legal means to repossess your home and force you to move out. If your property is worth less than the total amount you owe on your loan, a Deficiency Judgment could be pursued. Both a Foreclosure and a Deficiency Judgment can affect your ability to qualify for credit in the future. So you should avoid foreclosure, if possible.
There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.
- Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
- Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
- Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.
First of all, if you are struggling to make your payments, call or write to your lender’s Loss Mitigation Department right away. Explain your situation and be prepared to provide them with financial information like your monthly income and expenses. Just follow these 3 simple rules:
- Contact your lender as soon as you know your payment will be late.
- Never ignore the lender’s letters or phone calls.
- Don’t assume that your situation is hopeless.
Your lender will determine if you qualify for the following alternate solutions. Also, a housing counseling agency can help you with your options, plus interact with your lender on your behalf:
Mortgage Modification – If you can currently make your regular payment, but can’t catch-up on the past due amount, the lender may agree to modify your mortgage. One way is to add the past due amount into your existing loan and finance it long-term. Mortgage Modification may also be possible if you no longer can make your payments at the former level. The lender may modify your mortgage and extend the loan length, or perhaps take steps to reduce your current payments.
Pre-Foreclosure Sale – Foreclosure can be avoided by selling your property for a lesser amount necessary to pay off your mortgage loan. You may qualify if:
- The loan is at least 2 months delinquent
- The house is sold within 3-5 months
- A new appraisal, that the lender will obtain, indicates that the home value meets program guidelines.
Deed in Lieu of Foreclosure – This is when the lender allows you to give-back your property and forgives the debt. It does have a negative impact on your credit record; however it’s better than foreclosure. The lender may require that house be “For Sale” for a specific time period before agreeing. This route may not be possible if there are other liens against the home.
For FHA Loans – The lender may assist you in getting a one-time payment from the FHA Insurance Fund. The homeowner must prove the ability to resume making full mortgage payments on time, and other conditions apply:
- A Promissory Note must be signed allowing HUD to place a lien on your property for the amount received from the FHA Insurance Fund.
- The note is interest free, but must be repaid eventually.
- The note becomes due when you pay off the loan, transfer title, or sell the property.
For VA Loans – The Veteran’s Administration Loan Centers offer financial services designed to help homeowners avoid Foreclosure, and options for your specific situation.
Reinstatement – This is possible when you are behind in payments, but can promise to pay a lump sum of money to bring your regular payments back by a specific date.
Forbearance – It may be allowed to delay payments for a short period with the understanding that another option will be used to bring the account current later.
Repayment Plan – If your account is past due, but you can now make regular payments again, the lender may allow you to catch-up by adding a portion of the overdue amount to a certain number of monthly payments until your account becomes current.
Partial Claim – Your lender may be able to help you obtain a one-time payment from the FHA Insurance Fund to bring your mortgage current, if you qualify:
You may qualify if you are able to begin making full mortgage payments again.
When your lender files a Partial Claim on your behalf, the U.S. Department of Housing & Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note and a Lien will be placed on your property until the note is fully paid. The note is interest-free and is due when you pay off the first mortgage, or when the property is sold.
