What is a Foreclosure?

Foreclosure used to be the other “F” word. It carried a social and financial stigma that lasted for years. Now, it’s almost as common as getting in a car accident.

A foreclosure happens when a lender takes possession of a property after the owner becomes delinquent for a period of time. In Florida, the delinquency period may only be several months, but the process of actually taking possession can take years. Further, foreclosed (distressed) properties sell at a significant discount compared to non-distressed properties. That’s why most lenders try to avoid foreclosures like the plague. Most foreclosures start when a homeowner hits financial hard times. If it comes down to paying for food or paying the mortgage, people will stop paying their mortgage. Until the housing recession, most owners could sell their homes and at least pay off their mortgage, no matter how much that was, thanks to appreciation. Since property values have dropped, there’s no longer enough equity in most homes for this to happen.

There are alternatives to getting foreclosed on. The most common right now is a short sale, or working with your lender so that they allow you to sell the property for less than what you owe on it. Another option that is starting to become more common is a loan modification. New rules regarding Fannie Mae and Freddie Mac  loans allow you, under certain conditions, to refinance your home at current interest rates even if there is no equity in the home.

If you are unable to sell your home short or unable to convince the bank to allow you to do so, foreclosure may be unavoidable. It can be a gut wrenching process, but if you maintain residence in the home and have stopped making payments, you can at least take comforting knowing you’ll get many months of free housing.  Before deciding on a course of action, talk with a HUD approved housing counselor or a real estate attorney.