The foreclosure process is the bank’s (or other financial institution) final effort to collect money owed to them.
What often results from the foreclosure process is a repossessed house, damaged credit, and displaced living.
Despite the gloomy impacts, understanding how the foreclosure process works in California is important because it will help you learn about property ownership, mortgages, and homeowner’s financial options.
So, let's dive in with first understanding, what is a foreclosure?
What is a Foreclosure?
Foreclosure happens when the property owner fails to make their mortgage payments to the lender and defaults on the terms of the mortgage loan. The lender then repossesses the property and tries to sell it in hopes of retrieving the amount of money that was owed by the borrower. This process functions similarly throughout the country, so it's not specific to California.
Overview of the California Foreclosure Timeline
Here's a quick overview of the foreclosure timeline:
In California, the foreclosure process typically begins when a borrower misses a mortgage payment, triggering a Notice of Default (NOD) after about 90 days.
Following the NOD, the borrower has approximately 90 days to remedy the default before a Notice of Trustee’s Sale is issued.
This notice sets a date for the property to be auctioned, usually within 21 days.
If the property isn’t sold at auction, it may be listed for sale by the lender.
Throughout this period, the borrower can still avoid foreclosure by paying the overdue amount or negotiating alternatives such as a short sale.
Now, let's investigate each one of these steps in closer detail:
Taking Out Home Loans and Signing the Promissory Note
When someone wants to buy a home, chances are they will go to a loan lender to finance the purchase. They will withdraw a home loan, also known as a mortgage loan.
What exactly is a home loan? A home loan is a sum of money lent to the borrower for the purpose of buying property.
But, before the money is given to the buyer and transferred into escrow, the borrower must first sign a promissory note. This is a written contract agreeing to repay the borrowed money under specified payments in a period of time.
In other words, the borrower could promise to pay the lender a fixed rate of $1,500 monthly for the next 30 years.
Triggering Pre-Foreclosure: Failing to Pay Monthly Mortgage Payments
The borrower’s obligation, outlined in the promissory note, is to pay the lender back their money. When the borrower fails to make a payment, a red flag is raised and the lender will notice.
The promissory note was an agreement made between lender and borrower. The lender had to make a financial decision based on the borrower’s ability to make payments. Now that the lender is not receiving money, they will look for alternative ways to get compensated. Otherwise, they’ll be out the money loaned to the borrower.
This is how pre-foreclosure starts.
Pre-foreclosure is when a property is in the process of being repossessed. The minute a borrower defaults on their promise, a pre-foreclosure takes place.
Receiving a NOD and the Borrower’s Financial Options
Once a lender flags a borrower for missing their loan payments, they send a Notice of Default (NOD). A NOD is a court-filed public notice that declares the borrower has defaulted on their loan.
As the name suggests, this is a letter from the lender to the borrower notifying them of their missed payments. The borrower has 90 days from when they receive the NOD to fulfill the overdue payments.
Oftentimes, financial hardships are the reason why borrowers miss payments. They simply cannot afford to make the payments. If that’s the case, the borrower has a few financial options to escape the foreclosure process:
Option #1: Equity
In a pre-foreclosure, the borrower’s first option is their home’s equity. If the borrower has equity in their home, they can sell their home to get the money needed to pay off the loan.
For example, the borrower withdrew a home loan for $1 million. If the house they bought is worth $1.5 million, they can sell it to pay the loan in full.
Option #2: Short Sale
A short sale is a request by the borrower when their home is worth less than the loan amount. For example, the total amount of the loan is $1 million but the home is only worth $800,000.
Does the borrower still owe the remaining balance on a home loan after a short sale? No. The remaining loan balance is forgiven. But, the borrower does undergo massive damage to their credit score. This will make it harder to borrow money in the future.
Receiving a Notice of Trustee’s Sale and House Repossession
If the borrower fails to repay the overdue payments within 90-days, a Notice of Trustee’s Sale is issued. A Notice of Trustee’s Sale is a legal notice stating that the borrower’s property will be sold by a trustee within a given time period.
This is the lender’s way of telling the borrower that their house is being put up for auction. This auction may occur within a couple of weeks from the Notice of Trustee’s Sale.
The lender has the power to put the house up for auction as outlined in the promissory note that the borrower agreed to. In fact, the property is considered an asset of the lenders.
The borrower can still cancel the foreclosure process by paying the money back within this period of time. Although, time is now of the essence more than ever.
How Does a Trustee Sale Work?
A trustee sale of a house is an open auction that rewards the highest bidder. These are operated by the trustee, who has explicit power to carry out the specified direction of the lender.
If the home is sold during a trustee sale, the new owner takes immediate possession of the property. So, the defaulted borrower will have little time to vacant the property.
But what happens if the house isn’t sold during the trustee sale? The lender will still want to get as much money back as possible. So, they will hire a real estate agent to list the house and find a buyer.
Should You Take a Short Sale or Foreclosure on as a Real Estate Agent?
When it comes to handling short sales or foreclosures, real estate agents need to weigh the pros and cons carefully. Short sales can be valuable niche for agents willing to dive into the details.
They often involve sellers who are eager to offload their properties quickly, which can mean a faster transaction for you.
Plus, with fewer agents willing to tackle the complexities of short sales, you might find yourself in a less crowded field. Success in short sales can also boost your reputation as a savvy negotiator, which can attract more clients.
However, be prepared for a lengthy approval process and potential roadblocks as you navigate lender approvals and complex paperwork. It’s a challenging ride, but one that can pay off if you handle it right.
Foreclosures, on the other hand, offer a different set of opportunities and challenges. They provide a chance to work with banks and lenders, who might offer a steady stream of properties for sale.
The pricing is often more straightforward, as properties are typically sold at auction or listed at market value by the lender. But here’s the catch—foreclosures can come with their own set of headaches.
Properties might be in rough shape due to neglect, and the foreclosure process can be slow and cumbersome, filled with legalities and strict deadlines. If you’re up for the challenge and have the expertise to handle distressed properties, foreclosures can be a rewarding niche.
Just remember, it’s all about balancing the potential rewards with the effort required.
Final Thoughts on the Californian Foreclosure Process
One of the most crucial aspects of the foreclosure process is time. It’s all about the timeframe. If the borrower is having any difficulty making the payments, the best thing to do is to contact the lender immediately.
Things get messy when the borrower procrastinates the issues. This isn’t a problem that goes away if the borrower ignores it. It has the potential to leave a devastating impact on the borrower’s life.
