Foreclosure is more than just a mortgage lender forcing the sale of your home. It is a legal term that involves the “foreclosure of an equitable right of redemption”. To understand that, we have to understand what the equitable right is and how it affects you. We shall first discuss that, then the process and implications of foreclosure, and finally how to avoid it.

When you take a mortgage loan to purchase your property and then fail to make your payments, the mortgage lender can try to repossess the house in order to sell it and redeem their loan. However, a ‘court of equity’ can grant you what is known as an ‘equitable right of redemption’, meaning that you keep the house if you repay the debt.

Often this is not possible, but it can sometimes be possible for the borrower to raise the funds to pay off the mortgage, particularly if it is reaching towards the end of its term and there is not a lot left to pay. That is when their equitable right of redemption is important, and when lenders might try to force a foreclosure through the courts, removing any interest the borrower has in the property. The lender can then sell the property and the proceeds are used to pay the loan, any excess going to borrower.

It can be confusing to believe that a lender can pay off the entire loan while being unable to meet the monthly repayments, but they could do so by taking, for example, a secured loan on the equity, if it is sufficient, though you must wonder why they did not do that before foreclosure was a possibility.

The term therefore means more than just a forced sale, but to legal appropriation of a property with the mortgage payer have no further legal right to it. If the sale of the property does not realize sufficient funds to repay the entire loan, the lender can then sue for the balance.

A foreclosure is therefore to be avoided at all costs, particularly if the majority of the loan has been paid, since the borrower is left without a house, and even if there is a large part of the equity left over, it would generally be insufficient to purchase an equivalent property.

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There are two main types of foreclosure with the USA: a judicial sale and power of sale, although there are others that are applied in individual states. Let’s look at both of these two above.

Judicial Sale

In a judicial sale, also known as a judicial foreclosure, the court supervises the sale of the property, with the proceeds being shared first to the mortgage lender, then to any other secured loans and finally any excess going to the borrower. You would be notified of the court hearing, and its decision is normally announced after a hearing in a local or state court.

Power of Sale

A power of sale is enabled if such a clause was included in the mortgage, or if a Deed of Trust was used. A deed of trust contains a named trustee, independent of the borrower and lender that can order a sale of the property in the event of default. There is therefore no need for a court hearing, and the sale can occur very rapidly after the defaulting of a payment. The proceeds are apportioned as above, as with the judicial sale.

Acceleration Clauses

Acceleration clauses permit the mortgage lender to demand the full amount owed in the event of one or more payments being missed. Thus, if you take a mortgage for a certain amount, and there is an acceleration clause in the mortgage agreement, you may be asked to pay the full amount immediately if you miss even one payment. Such a clause is now very common, and provides protection to the lender against bad payers.

How to Avoid Foreclosure

If you feel that are in a position that you might not be able to meet your regular payments, it is useful to know how to avoid foreclosure. There steps you can take and it is wise to take the advice of a mortgage expert on this.

One popular solution is to apply for a mortgage loan modification. Such an application has to be made officially, using the correct forms, and you have to know how to negotiate with your bank manager or lender. Most people get nervous when talking to bank managers, and so need expert help. However, if done properly, an application can very frequently result in the modification of a loan to reduce your monthy payments.

Possible ways of doing this are reductions in the interest rate and also a reduction in the capital owed. The term over which your repayments are to made could be extended to reduce your monthly payment, and the success rate of modification applications is so high that this is a very viable means of preventing a foreclosure and saving your home.

This is particularly so in the current economic climate, where an increasing number of people are defaulting on their payments, and the price of housing is consequently reducing. Lenders are no longer so keen to foreclose, and will offer you alternative means of repaying your loan. Foreclosure is not yet a thing of the past, but there are now more ways of avoiding it than ever before if you speak to the right advisors.

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