What the foreclosure jargon really means
Discover what the legalese means regarding foreclosure and why understanding it can help save your home.
Did you ever wonder what some of the terms about foreclosure really mean? Since foreclosure is primarily a legal process, it’s easy to get lost in the technical legalese and terms. Here are some of the most commonly used terms and what they mean to lenders, housing counselors and homeowners who are trying to prevent a foreclosure from ever happening.
The first term is default which is often used interchangeably with delinquency or past due. They are not the same. Default means failure to pay a debt, in this case a mortgage loan. On the day after the due date, the loan is delinquent. If the loan continues to be delinquent, the lender can declare the loan to be “in default” or in doubt of collectability.
To avoid this, a lender will often try to minimize the consequences of default through loss mitigation. This term refers to the process of negotiating or re-negotiating the loan between the lender and homeowner to lower the potential for a loss to the lender. It is also known as a workout. There are a number of options available at this point.
- Repayment – the lender schedules a payment plan for the homeowner to catch up their delinquent payments along with their regular payments.
- Forbearance – The homeowner makes no payments for a set period, then sets up a plan to repay the past due amount.
- Loan modification – the terms of the mortgage are changed or modified to make repayment more affordable.
- Short refinance – the lender forgives a portion of the balance and refinances the remaining balance for more affordable payments.
- Short sale – Selling the home for less than is owed with the lenders approval. Since the lender is often taking a loss, they must approve the sale price.
- Deed in lieu – If a homeowner is unable to sell their home, they can sign the deed to the house over to the bank to avoid foreclosure in exchange for being released from paying the mortgage.
- Cash for keys – The lender pays the homeowner to leave the home in good condition after a foreclosure.
If the lender and homeowner (and hopefully the housing counselor) are unable to reach a plan to resolve the delinquency, the loan may proceed to foreclosure. This is a legal process where the lender can take back the collateral (the house and your land) for defaulting on the loan. In Michigan, this step can begin once the homeowner becomes 120 days past due. The homeowner can still negotiate with the lender on a workout plan at this point.
When loss mitigation is not successful, the foreclosure proceeds and the home is sold at a sheriff’s sale. The Sheriff’s office in the county where the home is located holds a public auction and the property is sold to the highest bidder. Most often, this is the lender as they have the biggest interest in the property and are protecting their investment. However, it is open to the public so anyone may bid though the winning bid must cover the lender’s bid. The sheriff sale is the legal way the lender takes ownership of the property.
After the sale, the redemption period begins. In Michigan, that is typically six months. During this time, the homeowner still has the right to redeem their home if they can pay off the amount that was the high bid at the sheriff sale. If that isn’t possible, then it may be time to plan your next move using the Michigan State University Extension toolkit for homeowners who are experiencing or have previously experienced foreclosure. This toolkit will equip these individuals and families with tools to help them recover their financial stability, in the case that a recovery of their home is not possible. The toolkit is available to download free at the MI Money Health website.