If a homeowner fails to make their mortgage payments, the lender may choose to foreclose on the property. Foreclosure is the legal proceeding by which a lender repossesses the property from the homeowner in order to sell it. Your mortgage documents will specify when the mortgage holder can initiate foreclosure proceedings.

Foreclosure by Judicial Sale

Foreclosure by judicial sale or judicial foreclosure means that the sale of the property happens under court supervision. Under judicial foreclosure, the proceeds from the sale of the property are distributed in the following order:

• The mortgage holder
• Any other lien holders
• Finally the borrower if there are any proceeds left over

Foreclosure by Power of Sale

Foreclosure by power of sale applies if there is a power of sale clause included in the mortgage documents or if a Deed of Trust was used instead of a mortgage. The sale of the property by the mortgage holder happens without court supervision and this is usually a much quicker process than judicial foreclosure. The proceeds from the sale are distributed in the same way as a judicial foreclosure.

Avoiding Foreclosure

There is a good amount of cost to the lender regarding foreclosure, so many lenders would prefer to work with the borrower to avoid foreclosure. Additionally, during times when the real estate market is suffering, if a bank forecloses on a property that is worth less than the borrower owes, the borrower may be responsible for the difference. Because of this it is important to try to work with your lender to avoid foreclosure.

Some lenders will choose to accept interest only or partial payments for a time to allow the homeowner to get back on track. This is called forbearance and many lenders will require you to make up the difference later. Some situations that will make a lender more likely to agree to a forbearance is if you will be receiving extra money soon, such as from a tax return or a bonus from work.

Loan reinstatement is where you agree to make up any missed or reduced payments by a specified date. Loan modification includes converting an adjustable rate loan to a lower fixed rate mortgage or making the loan terms longer so that your payments are lower, but for a longer period of time. Loan modification options can help you to keep your home by making your payments more affordable.

When you are trying to avoid foreclosure, it’s important to work with your lender sooner rather than later. If you know you will have trouble with your payments in the future, now is the time to work with your lender.

Making Home Affordable Plan

In 2009, the federal government instituted the Making Home Affordable Plan to assist homeowners in renegotiating their mortgages in order to remain in their homes. The Making Home Affordable Plan offers homeowners the option of refinancing their homes even when they owe more than it is currently worth or the option of modifying their current mortgage if they are having trouble making their payments.

This article is for informational purposes and does not constitute legal advice. Please contact an attorney in your local area for more information about real estate law.

Additional Legal Sites:  For more information on real estate and foreclosure laws please visit the Snyder Law Group.