When a home owner stops making mortgage payments, the lender has the right (and usually exercises it) to take the property back, assuming ownership of it, and evicts the borrower. The foreclosed properties is usually sold at an auction and/or via traditional real estate agents. For borrowers, a foreclosure badly damages their credit score.
It all starts with missing a payment. If it’s possible, make it up the next month. If you wait too long, the late fees and interest could make it impossible to ever catch up. Your lender doesn’t give you a break because you lost your job or suffered a serious illness. Unless you get it repaid soon, you are putting your home at risk.
When you get the point of being 90 days late, you are officially in default. At this point, the lender must file a Notice of Default with the court and you must be informed they’ve done this within 10 days. The usual way to notify you is to hang the paperwork on your front door. It will probably say that you should pay all the back payments, along with interest and fees and back insurance and property taxes (if you have an impound account). You must pay this back in one lump sum or you will continue to be in default.
The lender now gives you 3 months to get your loan current: that means paying all back payments, interest, fees, property taxes, and insurance. If you have not brought the loan current, you will be notified of the date of the sale of your house. You will receive the “Notice of Trustee Sale” typically sent to you via certified mail. 20 days after you receive this notice the lender can set a date for the auction. (It is now 200 days since you’ve missed the first payment).
The sale may be postponed by a court or by the lender for up to a year. When they set a new date, they will send you a new Notice of Trustee Sale. Then the house goes to auction and is sold to the highest bidder.
It’s possible for a lender in California to complete a foreclosure in just 200 days. In reality, these are just the legal minimum times. Most foreclosures take much longer. This is all on the lender’s timeline, depending on the backlog of foreclosures in their system.
In 2013, California put the Homeowner’s Bill of Rights into effect to protect homeowners and ensure enough time for homeowners to try to save their property with strategies such as loan modifications and refinancing. The bill stops banks from continuing the foreclosure process while a loan modification application is pending. This law can help to stretch the foreclosure process out significantly.
Most of the foreclosures done in California are “nonjudicial.” This means that the bank does not have to go through a court to foreclose. Once the property is sold at auction, your responsibility ends, although sometimes, you may have to pay fees relating to the sale. However, if you have a HELOC (home equity line of credit) you still owe that money.
California does offer “judicial” foreclosures. These foreclosures go through the court system. If your home is sold through a judicial foreclosure, you will be liable for the “deficiency.” That’s the difference between what you owe and what the house sells for at auction. In other words, if you owed the bank $200,000 going into the auction and the house only sold for $180,000, you’d be on the hook for the $20,000 difference. This takes a long time and is more expensive than nonjudicial foreclosures so the lender only pursues this avenue in rare instances.
Interestingly, This avenue of foreclosure offers the borrower the “right of redemption.” You can repurchase your home from whoever bought it at auction: If there was no deficiency, you may repurchase your home for up to 3 months after the sale. If there was a deficiency, you can purchase your home for up to 1 year after the sale. To redeem the property, you’ll have to pay the amount the bidder paid at auction plus anything he spent on repairs, insurance, and other expenses, plus interest. A former owner redeeming their home at this point is indeed very rare. But if the lender has waived its right to a deficiency judgment, you won’t be able to repurchase the home at all.
In California, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee's sale.
In reality the only way is to make a big enough payment to bring the loan current
You can gain more time by filing for bankruptcy. Bankruptcy uses a legal tool called the “automatic stay.” The automatic stay stops any collection actions against you, including repossession, collection lawsuits, and foreclosures. The lender can’t touch your home while you go through the bankruptcy process. Depending on the type of bankruptcy, you may be able to catch up your mortgage through your bankruptcy plan payments. You can step in at any point along the California foreclosure timeline to stop the process, right up until the auction itself.
Unlike a short sale, where you are in charge or the process, in a foreclosure the lender is in charge and the process is done to you.
You will need to find a place to move to. You may have to look out of the area. Most lenders will be reporting something to the credit agencies so it is best to find a place to live before your credit report is negatively affected. The lender has the right to have you immediately vacate the property and can commence eviction proceedings.
Mortgages in the United States are generally non-recourse loans. This means that once it’s sold, it’s done. The lender usually does not come after you later to ask you to pay back the part they have forgiven.*
Also in the state of California, most short sales of primary residences carry no tax penalties anymore. Previously, if the lender forgave, for example, $50,000 of a loan, The state and federal government would consider that a gift and you would owe taxes on the $50,000.*
Some lenders immediately send out 1099s, even if the owner is exempt.
Generally, a foreclosure will remain on your credit report in the trade lines section for 7 years and your credit score could fall 105 points to 160 points after a foreclosure.
If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record.
If the home was your primary residence, you may be eligible to buy another home in 5-7 years. If you are an investor and did not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.
When you apply for a loan, you are required to answer the question: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years?" If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.
*I am a Realtor and NOT a licensed lawyer or CPA. I cannot advise on those consequences especially since new laws are constantly changing the legal and tax consequences.
Under the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgement or claim.
Always obtain legal and tax advice before making a decision between a short sale, foreclosure or keeping a property.