Voluntary Foreclosure: A Quick Guide
The most common way to legally default on a mortgage is by going through a voluntary foreclosure. Until recently, voluntary foreclosures have been almost unheard of. Traditionally a family that was unable to afford the payments on their home would do everything they could to stay in it, including remortgaging the house or taking on second and third jobs. The recent bust in the housing market, however, combined with the loose lending standards of the past several years has created a situation where many people have no equity in their home and no way of making their payments.
this article if you’re underwater on your house).
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The most common way to legally default on a mortgage is by going through a voluntary foreclosure. Until recently, voluntary foreclosures have been almost unheard of. Traditionally a family that was unable to afford the payments on their home would do everything they could to stay in it, including remortgaging the house or taking on second and third jobs. The recent bust in the housing market, however, combined with the loose lending standards of the past several years has created a situation where many people have no equity in their home and no way of making their payments (see
The foreclosure process usually starts when the owner of a home decides that he or she can no longer afford the home, as opposed to an involuntary foreclosure, which typically starts as soon as the homeowner is in default. Note that in the United States, a loan account is in default as soon as the owner is late on a payment by at least one day. A voluntary foreclosure gives the owner of a home the ability to get out of a home on their own schedule, as well as the peace of mind that comes with knowing the eventual outcome of the situation.
It is very important to note that the credit bureaus do not look at a voluntary foreclosure any differently than an involuntary foreclosure. In other words, either type of foreclosure will have the same negative effect on your credit score, and any foreclosure can you leave you liable for the difference between your loan balance plus fees and the amount the home sells for at auction.
The first and most important step to a voluntary foreclosure is to decide that you will walk away from your home, and stick to this decision. Too often people in a bad situation decide to walk away, then experience an event that makes them decide against this step. This results in thousands of dollars being spent trying to keep the home away from the bank, and often the house ends up in foreclosure anyway. Once you decide that foreclosure is right for you, stick with your decision.
Immediately after you decide to let the bank take your house, stop making payments on your home. Instead, take whatever money you would have put towards your housing payment, and put it in a savings account. This will become the money you need to cover your moving expenses to your new home. If you have your payment automatically deducted from your bank account each month, call your bank and request a paper bill. Throughout this process keep your conversations with your lender as brief and cordial as possible. Most bank representatives are overwhelmed with foreclosures right now, and there is no reason to draw attention to yourself.
After your first month of a missed payment, you will get a notice with your bill. Historically, after three months of missed payments you will get a phone call from your lender, although with the current state of the industry I have some clients of mine tell me this has taken up to a year. This call can range from a negotiation of better terms to keep you in the house to a very threatening conversation designed to scare you into giving the bank some kind of payment. In a calm, matter-of-fact manner explain to the representative that you can no longer afford the payments, and are expecting to be foreclosed on. If the bank wants to negotiate, carefully consider their terms before agreeing to anything. Do not agree to pay anything that you cannot comfortably afford, and do not make any payments until you receive a written agreement of the new loan terms. If possible, have these terms reviewed by a real estate attorney, paid for from your new moving expenses stash.
Do not expect to be able to negotiate; many banks have very poorly-trained personnel handling these cases, and the unwritten rule in the industry right now is to let many properties go into foreclosure, get the loans off the books, then start over in a few years with a new market. Even if a representative says he or she can negotiate, do not get your hopes up. Thousands of people have been told this only to find out a few months later that their home has gone into foreclosure anyway. Even if you “catch up” on your back payments, the bank still has the right to foreclose simply because you were late. Although this is usually considered bad policy for the bank, most foreclosure representatives are too overwhelmed, understaffed, and undertrained to actually act in the bank’s interest, much less yours. I often tell my clients to treat negotiations with the bank like they are dealing with someone with a known history of theft; believe nothing that is said, insist on everything in writing, and do not give a single dollar until that contract has been reviewed by an attorney.
If negotiation isn’t an option, expect the house to proceed to foreclosure. While this process can take as little as thirty days, many of my clients are telling me that this can now take up to a year or more. One gentleman who lost his job (he has since found a new one but cannot afford his payments on his current salary) stopped making payments in January of 2008 and is still living in his house. Have a plan in place to move your belongings in a day, but you can plan to stay in your home until you are served an eviction notice from the local sherriff. During this time, get ready to move by starting to pack and looking for a new place to live. Continue to save as much as possible into your moving fund.
Once you are served an eviction notice, move your belongings out of the house as quickly as possible. Despite your understandable anger over the situation, do not cause any intentional property damage, and document the condition of the property on the day you leave with time-stamped photos and video. For further evidence, develop these photos and keep the receipt for proof of date and/or incorporate elements such as calendars, clocks, TV shows, etc. This will be your evidence of the condition of the house if it is later vandalized and the bank seeks money for damages from you.
Currently, hardly any banks are pursuing people for the difference between the loan amount and the value of the home at auction, but they are legally within their rights to do so. The amount can be reported to a credit agency, but it can also be discharged in a bankruptcy if necessary. Check with a lawyer on the laws in your state if this becomes an issue.
