In challenging economic times, money can be tight. So tight, in fact, that many homeowners are unable to make their monthly mortgage payments. As payments mount, this may lead to default under the loan obligation, enabling the lender to decide to foreclose upon the home.
A foreclosure is a legal process that allows a lender to recover the amounts owed by selling or taking ownership of a property that was used as security, or collateral, for a loan. Typically, a homeowner/borrower misses one or more monthly payments, and the loan is then considered in default. As a loan enters default, there are five general options available to cure the default under the loan (there are additional options, yet the main ones are as follows).
1. The Homeowner/Borrower Reinstates the Loan.
This simply means that the homeowner/borrower pays the delinquent amount, including any late fees or charges associated with the default. Some letters, or a formal Notice of Default, from the lender may say that the loan has been “accelerated” (i.e. the entire amount is now due). In California, foreclosure law permits individuals to reinstate the loan by paying only the delinquent amount and related charges, and then resume regular monthly payments.
2. The Homeowner/Borrower Sells the Property to a Third Party.
In the event that the property is sold for more than the amount of the loan, a sale allows the homeowner/borrower to pay off the remaining amount due under the loan. Assuming the home is worth less than the amount of the loan, a lender may allow for a “short sale,” where a lender agrees to accept payment of any amount less than 100% of the loan amount due as full payment for the loan.
3. The Homeowner/Borrower Transfers Ownership to the Lender by a “Deed in Lieu of Foreclosure.”
The homeowner/borrower and the lender both agree that the homeowner/borrower will transfer ownership of the property to the lender and the loan will be deemed fully satisfied. Such an agreement saves both parties from dealing with the cost, expense, and burden of foreclosure. This type of agreement is often alluded to as a “deed in lieu of foreclosure” or rather a “deed in lieu.”
4. The Lender Starts a Foreclosure Process and Commences a Sale of the Property.
In California, foreclosure laws permit the lender to start a foreclosure process, and then sell the property at a public auction, commonly reffered to as a “trustee’s sale.” Generally, after a property is sold in this manner, the lender, having caused the foreclosure, cannot further sue the homeowner/borrower to recover the balance owed on the loan.
5. The Lender Agrees to a Modification of Your Loan.
When a bank agrees to modify a loan, they agree to adjust the interest rate on the loan to make the monthly payments. Depending on a variety of factors, some banks have been amenable to a reduction of the principal balance on the loan.