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The Six Phases of Foreclosure

When you're facing foreclosure, it's crucial to ensure you understand what stage you're in and what can be done to help your situation. Being foreclosed on doesn't mean the end of your home ownership, but it will tell you that you have to start paying rent if you want to continue living there. If you don't comply with these rules, you risk being evicted from your home and losing all equity in it. The following six stages of foreclosure will help you navigate the process, whether you're the homeowner or the lender.

Phase 1: Payment Default

Property owners default on their mortgage loans when they stop making payments, which can lead to foreclosure. Default is generally triggered by an event, such as job loss or death. Most lenders try to work with the borrower to help keep the property; if no solution can be found, the lender may file for foreclosure, and a court proceeding will start. The owner has 30 days from being served notice to redeem the property (pay what's owed). If that doesn't happen, it goes up for auction.

Phase 2: Notice of Default

At this point, the company has been allowed to pay off its mortgage, but if they fail to do so, the lender is going to move on to Phase 3: Notice of Sale. Once that happens, the lender will set a public sale date and allow all creditors (even those who did not sign for the mortgage) to bid on their property at a foreclosure auction. You're forced to leave if someone bids more than what's owed on your home's mortgage during this auction. Then, the bank takes ownership of the house and sells it to the person or company that won the bidding war. The new owner now owns your home, even though you never agreed to sell it in return for anything other than paying off your debt.

Phase 3: Notice of Trustee's Sale

Phase 3 is when your house is advertised to potential buyers and you are served with a Notice of Trustee's Sale. The notice states that a sale date has been set and will likely be sometime within the next 45–60 days. At this point, if you still want to save your home, now is the time to make your best effort at raising funds. If you cannot come up with the money, other options may be available for assistance, such as pre-foreclosure counseling or short sales. If none of these options work out for you, then it is possible that bankruptcy could help.

Phase 4: Trustee's Sale

Finally, at the trustee's sale, any property not purchased by a bidder is sold. There are no redemption rights on these lots, and the successful bidder must produce a cashier's check for the entire purchase price, which becomes subject to lien foreclosure. Purchases typically happen with 15 minutes left before completion. The buyer needs to get the paperwork drawn up so there is time for due diligence and qualification before the deadline, or they risk losing out on purchasing their desired property. If the lot goes unsold at this point, it will be put up for auction again to find a higher bid. If nobody bids on the property during this auction, it will return to its defaulted status and return to Phase 1.

Phase 5: Real Estate Owned (REO)

Many people think they can purchase a foreclosure and make it their home. Unfortunately, that's often not the case. Once the property is REO, there is often damage to it. The bank may be slow to get it ready for sale; if they don't have a good maintenance program, the property may deteriorate further while on the market. Furthermore, even if you buy it, you are still subject to whatever claims other lenders may have against the property. Finally, banks are not always forthcoming about how much money was owed before they took ownership of the property (often because those loans were non-performing). They may also hide defects or problems with the house.

When buying a foreclosure, taking as many steps as possible is imperative to protect yourself from potential liability. One of the best ways to do this is by using an attorney specializing in these types of transactions.

Phase 6: Eviction

If a home is foreclosed on, the occupants will be notified and forced to vacate the premises. If they refuse, a sheriff or marshal can forcibly remove them from the property. They are generally entitled to reasonable notice before this occurs and will receive one final opportunity to rent the property or pay their back-owed mortgage to keep it. Failing that, they will have their belongings moved out onto the curb by movers hired by the foreclosure company. They may also be prohibited from accessing the house until after it is sold at auction.

While there are some protections for homeowners who occupy foreclosed properties, these depend on where you live, so please get in touch with your local housing agency for more information about how this process works in your area.

Final Thoughts

Your rights and options will vary depending on your specific circumstances. Contact an experienced foreclosure attorney to learn more about your rights and what you can do. You should also consider contacting a bankruptcy lawyer, who may be able to help with alternatives other than just going through foreclosure. For example, you might want to consider selling the property before it is foreclosed upon or filing for bankruptcy. Remember that the law is always changing, so make sure you get up-to-date information from a qualified professional before making any decisions that could affect your financial future.

If you want help figuring out what steps are best for you, contact the Law Offices of James C. Shields today!