The Borrower Has A 4-Month Window To Begin A Short Sale Before Foreclosure Can Start
The Consumer Finance Protection Bureau (CFPB) offers limited protection for borrows who are behind in their payments. The CFPB prevents lenders and their loan servicers from starting foreclosure until the borrower is more than four months delinquent, which provides time for the borrower to submit a loss mit0igation application. Additionally, if the borrower properly submits a loss mitigation application prior to the loan servicer filing the first notice or filing requirement to initiate a foreclosure process, the servicer is prohibited from starting the foreclosure process. In North Carolina, the Notice of Hearing is the first notice and official beginning of foreclosure.
The loss mitigation options are available for the borrower are:
- Loan Modification
- Short Sale
- Deed In Lieu of Foreclosure
Foreclosures Usually Proceed Quickly
There are myriad reasons why people fall behind on mortgage payments. Once the 4-month default period has passed the loan servicer can quickly commence the foreclosure process. An uncontested nonjudicial foreclosure can be completed in 90 – 120 days. With proper notice to homeowners, lenders in North Carolina may seek to foreclose a property through a public auction at the County Courthouse.
Additionally, under the Single Family Mortgage Foreclosure Act of 1994, 12 U.S.C. 3751, HUD-affiliated lenders issuing FHA loans can foreclose even faster simply by sending a notice of default and foreclosure to the homeowner, file it with the clerk of court and register of deeds, and post in a local paper, and the foreclosure sale is held a month later.
A Short Sale Is Often The Best Option For Avoiding Foreclosure
A foreclosure can negatively affect your credit score and future buying power for many years. There are several ways to avoid foreclosure:
Forbearance: To be sure, forbearance is only a temporary reprieve from paying the loan or mortgage payment. Most forbearances offered by the lender or loan servicers are for a period of 3 to 6 months. The traditional forbearance requires the borrower to pay all missed payments at the end of the forbearance period. Most borrowers are unable to make such a large lump-sum payment right after the life event that caused the financial issue. Because of this they are forced to seek a loan re-set through a months’ long loan modification process, or face foreclosure.
CARES Act Forbearance: A new version of forbearance under the CARES Act allows the missed payments to automatically be added to the principal amount of the loan permitting the borrower to pay only one payment at the end of the forbearance period. Cautionary note: Many loans fall outside of the CARES Act and follow the lines of the traditional forbearance with a full payment requirement.
Loan Modification (Loan Reset): The loan modification is the least understood and most unsuccessful of all of the loss mitigation options. Most borrows proceed with a loan modification with the false idea that their monthly loan payment will somehow be substantially reduced. This is usually not the case because the only factors that the lender or loan servicer can modify are the interest rate and the repayment period. Most loans initiated in the past 10 years already have low interest rates so there is often little relief available there. The repayment period can be extended but any positive influence that this might have on the monthly loan payment is mitigated by the fact that the loan principal was increased by the amount of the missed payments and late fees. The result is usually a slight decrease or increase in the monthly payment.
The real purpose of a loan modification is a loan reset. It is most appropriate when the borrower has had a brief financial interruption but is now able to continue to make the monthly payment but may not have the funds available to pay all of the back payments. In this case, the missed payments are put on the end of the loan, perhaps the loan period is extended slightly in order to keep the loan payment within the previous range. Most loan modifications are a 6 to 9-month process. There are strict guidelines that borrowers must follow and there is no guarantee that it will be approved. If the borrowers financial circumstances have not significantly changed since the mortgage payments went into arrears in the first place, this is not going to be a sustainable plan.
Short Sale: A short sale is another method to avoid foreclosure. A short sale offer to the lender or loan servicer should be pursued with the lenders’ loss mitigation department without delay. The lender must be presented a complete short sale package with a market price offer no later than 37 days prior to the scheduled foreclosure sale date in order to avert the foreclosure.
Deed in lieu of foreclosure (DIL): A deed in lieu of foreclosure is the voluntary handing over of the property deed to the lender in lieu of the them proceeding with foreclosure. This too is usually a 6 to 9-month process and often not available if there is more than on loan on the property, or it is a lot loan.
In addition to the loss mitigation options, there are other methods – each with varying levels of complexity and sophistication – to delay or avoid foreclosure. These include:
- Chapter 7 or Chapter 13 bankruptcy: Filing for bankruptcy can delay the foreclosure process, but lenders can file to lift the stay of the foreclosure proceeding.
- Litigation: Foreclosure defense attorneys challenge a lender’s right to foreclose in court. This is a less common method but may accompany another method.
Consult an attorney to discuss the consequences of these options. Your attorney can help protect your rights when you are contending with a foreclosure.
Consult With Us To Learn More About The Short Sale Option
It is important to keep in mind that while you are making decisions about potential solutions with your lender, the foreclosure process continues. Time is of the essence. It is critical to work with an attorney who is familiar with lenders’ loss mitigation procedures.
At Wilde Law Firm, our firm’s exclusive focus is navigating individuals and real estate agents through the short sale option to foreclosure. We help clients throughout North Carolina, South Carolina and select out-of-state cases. Call 828-254-6061 or email us to speak to an experienced short sale attorney.