Steps You Can Take When Facing a Pre-Foreclosure in California
The scenario of receiving a default notice from your lender can be nightmarish for you. The thought of your home being taken away by your lender was the farthest in your mind when buying it. Pre-foreclosure is the stage when the lender has initiated the process of foreclosure after the homeowner has delayed 3 of his EMI’s. Even though foreclosure is a distinct possibility, the house is still legally owned by the borrower.
Do You Know What Lenders Do When You Miss a Payment?
On every given date of a month, the borrower must deposit an EMI that covers the principal and interest. If the borrower misses an EMI, the lender waits for 10-15 days before the mortgage servicer assesses a late payment and adds it to the EMI as the overdue amount. This late payment is usually 5% of the outstanding amount in a month. Your promissory note that you signed when taking a mortgage loan contains all this information. If you miss EMI on the 2nd and 3rd month also, the loan servicer normally sends a letter at your address, reminding you to catch up with your payments. He may also call you to deposit the outstanding amount. It is ill-advised to ignore these calls and letters from your lender. In fact, you should take this as an opportunity to work out a compromise solution with your lender such as a payment plan, loan modification, or forbearance to avoid impending foreclosure.
If you have received a notice of default (NOD) from your bank, there is no need to press the panic button. You are not underwater yet and you can save your home from foreclosure, according to Beverley Hourlier, a San Diego real estate agent. The important thing to remember is that the bank is not interested in getting the property back from you. All it wants is to inform you what can happen in future if you do not act. In fact, a NOD is a way of reminding you that it is time to contact your lender and work out a solution to save your home from going into a foreclosure. Do not make the mistake of burying your head under the sand, hoping that the lender will forget about his money. Not taking any action would only take your home into foreclosure.
Pre-foreclosure is the beginning of the foreclosure process when a homeowner is late on his monthly repayments by more than 90 days. You can consider it as the early stage of the actual foreclosure process where the lender is weighing his options. Most lenders, and that includes your own lender, are interested in working out a compromise with their borrowers rather than taking possession of their properties. This is because it is not their business to take control of properties and plan for their sale. Do not think that the notice of default (NOD) sent by your lender is the end of the game or the loss of your home. There are many ways in which you can stop the lender from going for a foreclosure.
Sending a NOD to the borrower is a way of reminding him to make his payments current. After sending the notice of default, banks usually wait for a certain period to allow the borrower to make the necessary payments. This notice of default is also made public by the lender around the same time that it is sent to the borrower. According to Investopedia, the purpose of making this notice a public record is to prove later that sufficient time was given to the borrower before imitating foreclosure proceedings.
Options in Front of You as the Homeowner
You face the risk of foreclosure if you are more than 90 days behind your monthly obligations and have received a notice of default from your lender. There is no need to become fearful that it is the end of the road for your dream of ownership as there may still be several ways to avoid foreclosure. It takes 3-10 months for the lender to arrange a short sale or an auction of your home to recover his dues.
Check if You Have Built-in Equity in Your Home
Having a home in California has its own advantages. Prices continue to appreciate, building equity in your mortgage. If the market value of your home is more than what you owe to your lender, you can easily ask him to refinance the loan for you. This situation is referred to as in real estate terms as a mortgage above water. You can ask your lender to refinance your mortgage so that you start to pay lower monthly repayments. The lender can deduct the outstanding amount from your built-in equity.
You Can Go in For a Short Sale
A short sale is a method that allows the owner to walk away as an owner while the lender agrees to a price less than what the borrower owes to him. If you can find a buyer who is willing to buy your home for a price less than the market value of your home, you need to get permission from your lender to complete this sale. Many lenders agree for a short sale as they do not want to go through the hassles of long and complex formalities of a foreclosure. A short sale saves a lot of time and effort of the lender which is why he agrees to this method of recovering his dues. To exercise this option, you must ask for the permission of your lender for short sale.
While it is possible to list your home on the market and try to sell it through a real estate agent, it takes a lot of time and the lender is also involved with the process. Therefore, it is better to sell your house to an investor and pay the outstanding amount to the lender through the proceeds of this sale. Even if it is a short sale and you do not get any amount of money out of it, it is a good way to walk out of your home without carrying the stigma of a foreclosure. Selling your home through listing in the market is a win-win situation for both the parties as you can sell your home as a proud owner and the lender is also able to recover its dues form you. Also, there is no stigma of foreclosure attached to your name.
One of the ways to stop foreclosure proceedings dead in their track is to declare bankruptcy. Federal laws prohibit all creditors from taking any action to collect their dues from you in case of a bankruptcy. This includes your mortgage lender. However, bankruptcy brings temporary respite for you from your creditors. As the case goes to a court for a hearing, the bankruptcy trustee plays the role of a mediator between you and your creditors. You are not let off the hook as your outstanding amount to your creditors is collected through sale or auction of your assets. As such, declaring bankruptcy only buys you time and does not provide a solution to your problem of impending foreclosure. The trustee will work with your lender and work out a compromise formula under which you are asked to make payments regularly to the lender. It is advisable to consult a bankruptcy specialist attorney and explain your circumstance to him to know whether filing for a bankruptcy is beneficial in your case or not.
If your goal is to somehow keep your home, it is better to file bankruptcy under Chapter 13. However, if your goal is only to buy some time to delay foreclosure proceedings, experts suggest you file bankruptcy under Chapter 7.
Assumption or Lease Option
Most of the mortgage loans are not assumable. This means you cannot transfer your mortgage to any other individual or entity who keeps on paying your mortgage for the remaining duration of its term. There is a clause in all mortgage loans that says that the borrower must pay off the loan in entirety before he decides to transfer the title to any other person. However, in the case of having defaulted on a few of your monthly installments, it may be easy to convince your lender to allow you to modify the clause so that a buyer can assume your loan. Of course, the lender will want to verify the credentials and the trustworthiness of the buyer, but it is going to be a win-win situation for both you and the lender if the buyer assumes your loan. Do not forget to negotiate with the buyer and get a small amount of money from him so that you can pay off your pending installments to make the mortgage current.
The lease option is a method where you allow a tenant to occupy the property and continue to pay your monthly obligations using the rent paid by him. The tenant continues to save money until he can pay you a lump sum amount in the form of a down payment. By paying this money, he gets the option of purchasing your home. You can use this money to pay your outstanding amount to your lender and to make your mortgage current. The tenant continues to pay the monthly rent that is adjusted in your loan account. He becomes the owner of the property once he pays off the loan in entirety. This arrangement may seem cumbersome but if your lender agrees on it, it can help you in avoiding a foreclosure.
Deed in Lieu
This is an option in front of you when facing foreclosure proceedings. It is exactly what it says. You sign the deed and hand over the ownership of your home to the bank. This looks like a great option, but most lenders are reluctant to sign a deed in lieu. There have been many instances where the borrower has sued the lender later by saying he didn’t understand the real implications of handing over the home back to the bank.
Protection of Homeowners’ Rights
The state of California has passed Homeowner Bill of Rights that prohibits dual tracking of foreclosures. The main objective behind the passage of HBOR is to protect the rights of homeowners facing foreclosures. HBOR makes sure that homeowners get the opportunity to explore their options such as loan modification or other ways to avoid a foreclosure.
Under HBOR, mortgage services are prohibited from sending a notice of default to the borrower until 30 days have passed since he met or contacted on phone the delinquent borrower to discuss ways to avoid foreclosure. Under this law, the servicer must meet the borrower in person or through the phone to discuss his financial condition and to explore ways of avoiding foreclosure. The servicer must inform the borrower that he has a right to request a subsequent meeting within 14 days of the first contact. Finally, the servicer needs to give the borrower the telephone number of the HUD-certified housing cou8nselling agency. The borrower can talk to the agency to learn about ways to avoid foreclosure in his circumstances.
There are some other provisions under HBOR to protect the rights of homeowners. It prohibits dual tracking which means the servicer cannot, on the one hand, contact the borrower to discuss ways to avoid foreclosure and on the other hand going ahead with foreclosure proceedings.
Under HBOR, a servicer must give a denial notice in writing to the borrower if his loan modification request has been rejected by the bank. This notice must contain reasons for declining the request for loan modification.
Keeping in mind the rights provided to you under HBOR, you can move forward with confidence to work out a solution to your problem of pre-foreclosure. You can resort to any for the methods described above to avoid foreclosure and loss of your dream home in California.
Disclaimer – Please note this content was written to provide information about the foreclosure process in California and is not legal advice.