Foreclosure is a legal process by which a defaulted borrower is deprived of his or her interest in the mortgaged property. It is estimated that currently one in seven Americans are in some stage of default. There are many underlying reasons for foreclosure such as: job loss, business failure, payment increase or mortgage adjustment, divorce or death of a spouse, illness, relocation, reduced income, mortgage fraud and predatory lending. For most owners, mortgage default and foreclosure proceedings represent a very stressful time.
The following is a list of terms and acronyms that are related to the process of foreclosure.
PRE-FORECLOSURE - The period beginning with initial mortgage default up to when the distressed property is sold. This varies from state to state. The timeline for Alabama is 30-60 days. Information about Alabama Foreclosure Law can be viewed at www.foreclosurelaws.org.
NOD - Notice of Default (NOD) is the official notice from the lender that the borrower has defaulted on the mortgage. The NOD begins the foreclosure process.
REINSTATEMENT PERIOD - This is the time stated in the NOD in which the borrower may reinstate the loan by making the required payment s and bringing the account into good standing.
SHORT SALE - A situation in which the seller owes more money on the loan than the sale of the property will likely produce on the market and is unable or unwilling to bring money to closing. The seller may or may not be in pre-foreclosure.
NOTICE OF SALE - If, after receiving the notice of default, the borrower does not or is unable to reinstate the loan, a notice of sale is recorded. The notice of sale explains when and where the foreclosure sale will be held.
FORECLOSURE SALE - Also known as the sheriff's auction, sheriff's sale, or trustee's sale, this is when the property is auctioned for sale to the highest bidder.
REDEMPTION PERIOD - This is the time that is given to the distressed owner to redeem real estate after the foreclosure sale. Redemption typically requires that the owner pay the sales price, interest, and other costs. Alabama has a 12 month "Right of Redemption" period.
REO - This acronym stands for "real estate owned" (REO). REO is the status of the property when the foreclosure sale is not successful and the ownership of the property is transferred involuntarily to the lender.
The process of foreclosure begins with the following:
- Borrower misses payment(s)
- Lender attempts to contact borrower.
- Lender sends notice of default (NOD), officially starting the foreclosure process.
- If borrower does not reinstate loan within required amount of time, notice of sale is recorded and published.
- Foreclosure sale is conducted as published.
- If unsold to another party, ownership of property is transferred to lender. The property is now real estate owned (REO).
Foreclosure has consequences not only for the distressed homeowner, but for the neighboring homeowners and the surrounding community as well. The homeowner loses their home along with any equity they might have accumulated over the years. Foreclosure lowers credit scores by 200 points or more and remains on credit history for seven years. Neighboring homes may decline in value which decreases equity and having an empty home nearby increases the possibility for vandalism and theft. Declining home values reduce the taxpayer base which affects the community as a whole.
This can be a very scary time for someone facing an impending foreclosure. Many distressed homeowners have options that they did not even know existed. Refinance, selling the home and bringing cash to the closing, lender workout or possibly a short sale are some possibilities to consider. Avoiding lender contact or doing nothing and walking away will only cause greater trouble in the future.
The U.S. Department of Housing and Urban development (HUD) provides information about approved foreclosure avoidance counseling agencies. Visit www.hud.gov/foreclosure for more information. It is highly recommended - if you find yourself in this situation - to seek advice from qualified finance, tax and legal professionals.
According to statistics, when facing financial difficulty, one of the biggest problems is that most people do not know or understand options that might be available. Certified in SHORT SALES & FORECLOSURE by the National Association of REALTORS®, I can serve as a resource for you and your family to provide information and strategies to help make the best decisions for the future.