As a homeowner, foreclosure is a term you should recognize, but how much do you really know about it? If you haven’t experienced a foreclosure before, chances are you probably don’t know much. In the event your financial situation ever takes a turn for the worse, you should know exactly what foreclosure is and how it works.

What is Foreclosure?

Foreclosure is a process by which a lender regains a property they have financed. Typically, this is because the borrower or homeowner is behind on mortgage payments and is unable to catch up, often due to circumstances outside of his or her control. When the lender forecloses on the home, the homeowner must move out of the house, therefore losing possession of the property and jeopardizing any possible equity they may have in the home. There is a legal time frame, varying from state to state, which determines how long the foreclosure process can take. Some foreclosures can take months and others can take years.

Why do people go into foreclosure?

What happens when payments are missed?

Usually, mortgage payments are due the first of each month. Most mortgage companies will grant a 15-day grace period to make the payment before they issue a late charge. You have until then to pay before they report you to a credit bureau for a late payment. This grace period shouldn’t be abused—you should always pay on the due date unless absolutely necessary. Okay, so you’re still thinking ‘It’s just one late payment”–which is true, but it’s one late payment that carries a lot of weight. When a payment is late for credit cards or a car loan, it will be reported, but you won’t notice a huge dent in your credit score. However, it can take years for your credit to recover from a late mortgage payment. Once reported to the credit bureau, a couple things will occur (depending on the state).

You could be issued a Notice of Default (NOD), which is a public notice that you are in default (failing to repay) on your loan. This notice will tell you what needs to be done to ‘cure’ the default, typically making up the payments and any additional late charges or fees.

If you fail to cure the default, a Notice of Sale (NOS) will be issued. This generally states the property will be sold at a public auction, and provides the date, time and location of the foreclosure sale.

Each state has different procedures, so you might receive a NOD then a NOS, a combination of both, or just a NOS. You should review the specific procedure for your state to know what their process is.

Types of Foreclosure

While you might be aware of foreclosure, did you know there are actually multiple types of foreclosure used in the United States? Here’s a brief explanation of three: judicial, non-judicial, and strict.

Judicial foreclosure is more significant and is often the required process. This foreclosure requires the lender to proceed under the supervision of a court. All parties must be notified and are included in the trial, and the home will be sold in a public auction. This process can be quite timely, typically taking over 6 months.

Non-Judicial foreclosure is also known as a “power of sale”. This process gives the lender the ability to find a buyer on their own and doesn’t require the court to get involved. As a result, this process is often much faster.

Another less-used type of foreclosure is strict. Strict foreclosure is only used in a few states and usually only when the amount of debt exceeds the actual worth of the home. A judge will set a period of time for which the mortgage must be paid. If failed, the owner will lose all rights to the property.

How can foreclosure be avoided?

Avoiding foreclosure is very easy if you are responsible. You should remember to:

As a homeowner, foreclosure is something you hope to never experience. If you do, losing your home is NOT inevitable. Foreclosure is a process, which means there are still steps you can take to prevent it from moving forward. Be aware of your financial situation, so if you do require assistance, you catch it early and can get back on track.

Even if you experience foreclosure, you can still own a home. NFM Lending offers a variety of products to help homebuyers with a previous foreclosure. For more information about these products, mortgages, or the homebuying process, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the process, click here to get started!

Getting ready to buy a home requires setting a few ducks in a row. For example, ensuring your credit is in the best possible standing. This might require some time (and patience) but it needs to be done. The better your credit score is, the higher the possibility that you will be approved for a loan, as well as receive a better interest rate. The following are ways you can avoid running into common credit issues.

Incorrect Information: It is recommended to obtain your credit report every year, so you can review your information. When you receive it, ensure your name is spelled correctly. If this is inaccurate, there could be data on your report from someone else with the same name. Likewise, double-check all your information, including your address, birthday, employer data and Social Security number. If you do find an error in your credit report, write, don’t email or call, the credit reporting company. While the three credit reporting companies, Equifax, Experian, and TransUnion, offer the option to dispute errors online or by phone, most experts recommend mailing a certified letter, so you have documentation in case your dispute isn’t resolved. In the letter, you should explain what the error is, include photocopies of any documents that support your claim, and ask them to correct the error. You can also include a copy of your report with the error highlighted. Make sure to keep copies of your letter and all documents. Lastly, keep in mind that through the three credit bureaus you are entitled to a free report every year. Therefore, you should request a free credit report from one bureau each quarter to monitor your credit score.

Identity Theft: Identity theft occurs when someone uses your name, Social Security number, date of birth, or other identifying information, without your permission to commit fraud. There are several steps you can take to protect your credit and identity. These are just a few:

Missed or Late Payments: Everyone can be a little forgetful, so if you find you’re having a hard time remembering to make credit card payments, this could affect your credit score. Making credit card payments on time is the fastest way you can enhance your FICO score. If you miss any payments, you will see your score drop rapidly. If you have trouble remembering to make payments, try setting up a calendar reminder on your computer/social device. Every little reminder will help. You might also want to consider setting up automatic payments but be careful not to overdraw your account.

Common Credit Issues

Overspending: Using a credit card is a fast and easy payment method, but if you are not cautious, you could sink into debt before long. It is important to recognize that credit is not free money and must be paid back. Your credit score will reflect the negative impact of having a lot of unpaid debt. The best way to avoid this situation is to curb your spending as much as possible. You don’t want to completely stop using your credit card, but if you create a budget, have a little self-control, and can afford to make larger payments towards your debt, you can improve the state of your credit.

Closing Old Credit Card Accounts: Closing old accounts can lower your credit score. Account history is an important factor of your credit score. Your mortgage lender will be able to see your financial responsibility throughout time, so the older the account is the better. Even if you pay off a credit card, you’re usually better off keeping that card open.

New Accounts: While you are trying to repair your credit score, don’t open any new credit card accounts or make any large purchases. It is best to focus on the accounts you have. It may be tempting to open a new department store credit card to receive a discount, but it may impact your credit negatively if you can’t afford to make the payments. If you really believe you should get one of these credit cards, review your financial plan and determine if you can truly manage the cost.

Achieving your dream of homeownership is possible, it just might take a bit of time and effort. Having good credit will make that dream more financially attainable.

If you have any questions about credit, mortgages, or the homebuying process, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the process, click here to get started!

NFM Lending is not a Financial Advisor or Credit Repair Company. You should consult with a Financial Advisor/Credit Repair Company to learn more.