Most people buy a home by financing part of the purchase price from a bank or a mortgage company. Sometimes, homeowners will borrow money against the equity in their property after they have purchased it with a “home equity loan”. And sometimes, people will refinance their mortgage loan and combine it with a home equity loan. In most of these cases, the lender has a lien against the home to make sure they are repaid for the loan. If the buyer does not make their payments (defaults), then the lender can foreclose, which means they sell the house to repay what is owed to them.
There are 2 types of foreclosures in California, Nonjudicial foreclosure and judicial foreclosure.
Nonjudicial foreclosure is the most common type of foreclosure process in California. Nonjudicial foreclosure occurs when there is a power-of-sale clause granting the trustee selling authority if the borrower defaults on the mortgage loan and fails to make required payments. This power-of-sale clause is included in the deed of trust securing the mortgage loan.
When a lender uses the nonjudicial foreclosure process against a borrower rather than collecting a deficiency judgment, it is often quicker and less expensive.
Judicial foreclosure occurs when you file a lawsuit to seek a court order that permits the sale of your home through foreclosure. This process is necessary when there is no power-of-sale clause included in either the mortgage or deed of trust. After the court orders the sale of your property, it will more than likely be auctioned off to whomever submits the highest bid.
Although judicial foreclosures are not as common in California, they do allow the lender to receive a deficiency judgment against the borrower. However, the homeowner has what is called the “right of redemption,” which allows them to buy their home back from whoever wins it at auction for up to 1 year after the sale. Although this process is lengthier and more expensive than a nonjudicial foreclosure, some homeowners feel that it’s worth going through in order to have another chance at saving their home.
Before the foreclosure process begins, the lender or loan servicer may send you letters (over the course of several months) demanding payment of your mortgage debt. However, these letters are NOT Notices of Default. Before the Notice of Default happens, the lenders must start the foreclosure process as stated below.
A foreclosure won’t affect you forever, but it will take some time for your credit to return to normal. Your credit score will be negatively impacted and it will be hard to get a mortgage, car loan, and other forms of credit. If you do get approved, it will usually be higher interest rates.
You can avoid foreclosure by keeping in communication with the lender before they start the legal process. You can explore options like loan modification, foreclosure prevention programs, or short sale to stay on top of your payments. When working with your lender, be sure to prioritize your financial well-being and avoid signing any agreements that aren’t in your best interest. It’s also important to seek out professional help from a foreclosure attorney if you need more guidance.
You can stop the foreclosure by curing the default and reinstating your loan or by filing Chapter 13 Bankruptcy and figuring out a repayment plan that all parties involved can live with. You can also file Chapter 7 Bankruptcy, but this will only stop the foreclosure from happening in the immediate future. You will still be expected to pay back the full amount of the loan balance.
If someone buys your home at a foreclosure sale or auction, the new owner can’t just change the locks. The new owner must serve you with a 3-day written notice to quit (move out), and if you don’t move out in the 3 days, they’ll have to go through the formal eviction process in court to get possession of the home. That process usually takes several weeks but can take much longer.
You can get your home back after a foreclosure if you go through a judicial foreclosure. However, judicial foreclosures are very rare in California and can cost more money than its worth. If a judicial foreclosure does take place, the home owner has a redemption period of 1 year called a “right of redemption” to buy back the home from the new buyer at the auction.
The old waiting period for a foreclosure was 5 years, but now you must wait at least 7 years under Fannie Mae or Freddie Mac guidelines.
You could potentially shorten the waiting period to three years for a Fannie Mae or Freddie Mac loan if you can prove that extenuating circumstances (eg. an unpredictable event that caused a significant and prolonged loss of income) were responsible for the foreclosure.
You typically have to show that the foreclosure resulted from extraordinary conditions, like illness, divorce, or job loss. Additionally, you need to use the new mortgage loan for a primary residence; it cannot be put towards funding another property.
Fannie Mae offers mortgages with a maximum loan-to-value (LTV) ratio of either 90% or the LTV listed in Fannie Mae’s eligibility matrix, whichever is greater.
Freddie Mac offers mortgages with a maximum loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit TLTV (HTLTV) ratio of the lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction.
You must typically wait at least three years after a foreclosure to qualify for an FHA-insured loan. The waiting period starts from the date that the home’s title is transferred to the new owner as a result of foreclosure proceedings.
If your foreclosure included an FHA-insured loan, the three year waiting period starts when FHA paid the previous lender on its claim. (If a foreclosure sale price falls short of what’s owed on an FHA-insured loan, the lender can make a claim to the FHA for compensation.)
The lender may make an exception to the three-year requirement if the foreclosure was due to factors outside of the borrower’s control, such as a serious illness or death in the family, and the borrower has since reestablished good credit.
Although divorce isn’t normally an exception, if you can show that your mortgage was current at the time of the divorce and your ex-spouse received the property in question, you may be able to get an exception. Furthermore, being unable to sell a property due to a job transfer or relocation doesn’t automatically qualify as an extenuating circumstance.
Most people have to wait two to three years after they go through a foreclosure before they are able to get another VA mortgage. The waiting period may be shorter if the event that caused the foreclosure was out of your control. However, sometimes the wait is 3 years. For example, if you lose an FHA-insured home through foreclosure, you might have to wait three years before securing a VA loan for another home.
The waiting period for FHA-insured and VA-guaranteed loans is shorter than most other types of loans, like subprime loans. The waiting period can range from two to eight years or longer. Some lenders might reduce the waiting period after foreclosure if you make a larger down payment and agree to a higher interest rate.
Filing for bankruptcy to stop foreclosure is an option that you should discuss with an experienced bankruptcy attorney. You might be able save your home through Chapter 13 bankruptcy if you fall behind on your mortgage payments. Chapter 7 bankruptcy will stop the foreclosure with the Automatic Stay, but that will only work for a short period of time.
If you would like more information regarding bankruptcy to stop your foreclosure, give us a call at 909-915-0181 or 760-835-9353 to have an experienced riverside county bankruptcy attorney give you a free consultation. Together we can help you protect your assets and stop the foreclosure from happening.