By: Dan Rochon

It is thought that once a homeowner misses a mortgage payment, he or she is at imminent risk of being foreclosed. The truth is, a lender has to go through a legal process in order to claim a property on which it holds a mortgage.

In most states, “statutory” or “non-judicial” foreclosure is used. In a non-judicial foreclosure, the lender will first follow a procedure to attempt to collect the unpaid debt by giving the debtor a notice of default. Default on a payment is how a property first enters into the foreclosure process. If the lender fails to collect the unpaid balance, he or she will issue a Legal Notice that notifies the owner that the foreclosure process has begun. If the debtor does not pay the debt or uses lawful means to stop the foreclosure (such as filing bankruptcy), a Bank Sale or Auction Date will be set. At the conclusion of the Bank Sale or Auction, the lender may become the property owner and the property will most likely be placed with its Real Estate Owned (REO) department.

The bank that forecloses on a property can pursue the previous owner for any deficiencies amount that it was unable to recover through the foreclosure. For example, an individual owes a mortgage of $425,000 and after the foreclosure and resale process, the bank sells the property for $300,000, a deficiency judgment for the difference of $125,000 could be obtained against the previous owner. This will allow the bank to pursue collections of this amount. The rules that govern foreclosure are set by your state and you should consult with an attorney for explanation regarding legal matters and a qualified tax advisor concerning tax implications.

Pre-foreclosure

When an owner misses a payment, he or she is in default of the mortgage. During this time period, before the final bank sale, the owner still maintains control of the property and can list the property for sale, sign documents, and do whatever is necessary to avoid foreclosure. This is the owner’s chance to save him or herself from foreclosure. The bank is in the business of lending money and not in the business of owning real estate, so in most cases it would make every effort possible to avoid taking ownership of the property.

REO Property, Opportunity Lost

If a property is foreclosed, it is either sold to a bidder at an auction or is taken by the bank and placed into its Real Estate Owned department. It is the REO department’s job to sell the asset for the most money in the quickest time possible. At this point, the previous owner of the property has lost control of the process and a foreclosure has been filed against him or her.

Reasons to Avoid Foreclosure

Often homeowners in distress do not understand their options and the consequences of not taking any action. If a property is foreclosed, there are many repercussions.

In the future, the foreclosure will have to be divulged on any new mortgage application.

If the applicant is approved for a new mortgage, the past foreclosure will likely affect the terms and rates of the mortgage in a highly undesirable manner.

Security clearances, and in some instances, employment may be jeopardized.

The lender may ask for a deficiency judgment and collect any unpaid balance due to it. The lender may seek this payment by any legal means, including garnishment of wages and social security benefits.

Credit scores can be lowered by over 300 points and may have a catastrophic impact on future credit, including insurance rates, utility deposits, and the ability to finance items and rent or purchase property.

Foreclosure is a credit item that is one of the most difficult to repair and overcome.

Options other than Foreclosure

Marketing and selling your home as a short sale is a way to prevent foreclosure. Often a bank will allow a short sale if they believe it will result in a smaller loss than foreclosing. A short sale is when a bank will accept less than what is owed on it as a payoff. The homeowner may avoid having the foreclosure on his or her credit history and sometimes the deficiency (difference between mortgage and final sale proceeds) is forgiven by the bank. Situations will vary; to determine if your property could be sold as a short sale, contact Dan and Traci & Consultants with Keller Williams Realty at 703-562-1791 or go to

www.VirginiaShortSaleRealtor.com.