Pre Foreclosure... Now What?
Did you know the number of defaults on home mortgages in San Diego County doubled from October 2021 until February 2022? Why? Well, with the moratorium being lifted as well as forbearance options have slowed or expired, which is in part why we are seeing this increase. If you have found yourself in the position of being late on your mortgage, then this information is for you.
Maybe you lost your job, got a divorce, lost a family member or spouse…perhaps you have tenants who didn’t pay their rent during the Covid-19 pandemic and as a result you were put in a tough financial situation. Whatever the case may be, it’s important to understand what options you may have with your property.
First of all, let’s start with some basic vocabulary:
Pre-Foreclosure: This is the process of a bank foreclosing on the property due to lack of payment on the loan or mortgage. Sometimes the pre-foreclosure process is initiated by unpaid HOA dues, tax liens, or other liens on their home that go unpaid for prolonged periods of time.
In the case of the mortgage or loan not being paid, the pre-foreclosure process commences with a notice of default (NOD) being given on a property usually 90 days after the payments have been late. Depending on the bank and their process, they may also issue a Notice of Sale which is the date that through sale (usually by auction). In California, a homeowner has up to 5 days prior to the auction or sale of their property to reinstate their mortgage by paying late fees, plus the past due amounts and any fees to reinstate the loan. 5 days prior to auction until the auction, a property owner may redeem their loan by paying past due amounts, fees, AND the remaining amount due on the mortgage. Take home message… don’t wait to take action folks.. you don’t have a lot of time to come up with a plan.
Notice Of Default (NOD): When is it reported? Usually, banks will report the default in payment within 90 days of your first missed payment. Remember that mortgages are paid in arrears, so by the time you miss one payment, you’re already 30 days late.
In California, we primarily use a deed of trust rather than a true mortgage as our financial instrument to hold ownership to a property. As a result, most foreclosures in California don’t require the same lengthy judicial process as other states because the deed is held by a 3rd party other than the bank. As a result, often a foreclosure will move much more quickly here in California than other states that have longer court hearings and judicial processes. Most foreclosure processes are carried out by a trustee or lawyer who is appointed by the bank to manage the foreclosure process so all communications during this foreclosure process need to go through this trustee.
While the many banks will want to work with homeowners who may have been in a short term forbearance or having financial hardship, often these options don’t match up with what a home owner may really need. The most 2 common ways that banks will do this is through a forbearance or a loan modification.
Forbearance: Short term pause on loan/mortgage payment, usually done secondary to temporary financial hardship. During Covid-19 pandemic, many mortgagees were offered this option. The trouble is for some people, they have had longer term financial hardships, and each month that goes by that their loan is in forbearance, they lose ground on their equity and options to get back on track.
Loan Modification: A loan modification is a modification to original mortgage. Often a bank will require a homeowner to ‘re-qualify’ for this payment option, which generally means there needs to be consistent/ steady income, often 3x the amount of the new mortgage payment, coming in. For the homeowner, think about the loan modification as being the path you would take if you wanted to keep your home, AND, you were able to qualify to continue to make payments. When you apply for a loan modification, you are showing/proving to the bank that you have ample income to continue to make the payments and stay in your home.
There are usually 3 ways that the loan is modified.
1) Increase in length of time / duration of loan: If you had a 30-year mortgage, the bank may add up to 10 more years to your mortgage to stretch out the payments. Keep in mind the problem with this is that you will lose equity. E.g.: Lets say you have been paying on your mortgage for 10 years, have 50% equity in the house, and now your loan is stretched out 10 more years (principle/ fees/ interest).
2) Increase in interest rate:
3) Junior lien can be placed on property in the amount of past due plus fees etc.
So what are my choices if I can’t extend my forbearance, qualify for a loan modification, or reinstate/redeem my home loan?
Great Question… so if you are in the situation where you don’t have the financial means to make payments or modify your loan.
- Take some time to determine if you’re ‘right-side up’ or ‘upside-down’ on your home. In order to do this, you’ll want to determine what you owe on your property, if you have any back taxes or liens, and if you have any equity in the home.
- Remember the longer you don’t make payments on your home, the more it hurts your credit score, and your bank may be more likely to issue a Sale Date for your home.
Sell Your Home On The Market : This may be the easiest and quickest way to get out of your situation. We can help you list it and get top dollar, or, if you are in a time crunch, we work with investors who often can work on short time lines to help you close and stop the foreclosure process.
Deed in Lieu (of Foreclosure): This is essentially where property owner surrenders deed to property in lieu of foreclosure. The property owner essentially is being let off the hook for responsibility of the mortgage by trading the deed for his/her property. This is usually done in states where the foreclosure process is longer/ drawn out. It is seen less frequently in non-judicial foreclosure states because the process itself is shorter.
Short Sale: This is where the owner owes more on the property than it’s worth and they would need to show up to closing owing money to the bank. Short sales occur when a homeowner owes more than their property is worth, AND the property owner has experienced a financial hardship and is either maxing out credit, using up all savings, and/or unable to continue to make payments on their home.
We partner with one of the nation’s leading Short Sale negotiators, The Short Sale Queen. This provider does 100’s of short sales monthly and has streamlined the process so that you can show up to the closing table owing nothing more on your home, walk away, and with any bit of luck apply for relocation assistance so you can begin fresh.
Have more questions.. Want to chat about your options? Please reach out by filling out the contact form below.. .OR call/text us at 760-388-6825.