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What is “Foreclosure?”

What does "Foreclosure" mean?

What is “Foreclosure?”

If you own a home, or have ever dreamed of buying your own home, it’s important to know the facts regarding the consequences of getting behind with your mortgage payments. Fact Frenzy offers an explanation about one thing you should avoid — what the banks and lending institutions call “foreclosure”.

So, what is foreclosure? Basically in simple terms — it’s when the bank or lending institution takes your house away from you.

There’s a lot more to it than that, so before we all get ready to march to their front gates with torches and pitchforks, let’s look at why foreclosure happens, and how it happens.

When you buy a home, unless you’re just paying for the house with your own cash that you’ve saved under your mattress, chances are you’re like most of us who turn to the bank for a mortgage loan. Now it’s important to understand that until your mortgage is paid off, you technically don’t own the house / property yet. The bank, credit union, or other lending institution that granted you the mortgage loan does. Once the house is paid off, the house becomes fully yours. If you’ve paid off your mortgage, congratulations!

If you’ve missed payments, look out. The mortgage loan is now in jeopardy of being “defaulted” — meaning you haven’t kept up with your end of the bargain. You’ve probably been buried with bills from soaring, high gas prices, utilities, college loan payments, food, and other commodities. Or perhaps you’ve lost a loved one, or have been through a divorce. Regardless of the state of the economy or your personal financial situation, remember that banks’ number one priority is to make money. They are accountable to their shareholders.

Foreclosure is when your mortgage has defaulted, and the bank takes your home or house away.

“Foreclosure” is when your mortgage has defaulted, and the bank takes your home or house away.

Once the loan has been defaulted, the bank can then take back the property and house. It’s a legal process, which in fancy business-speak is called, “terminating the borrower’s (that’s you) interest in the property”. What happens next is the bank will then sell the property, recover its own expenses and the remaining amount borrowed, and legal costs.

Now suppose you were in your 29th year of paying on your 30-year mortgage, for example. The bank may return some of the remaining proceeds to you after the sale. In other words, you may recover some equity in what you did pay until now. Though all is not lost, the house you’ve lived in for the past few decades and your kids grew up in is now gone. And, a foreclosure on your credit report may create a whole new set of problems in trying to secure a loan for another house.

If this has happened to you, always remember there are ways to get back on your feet. Sometimes the best strategy is to consult with a wise, experienced financial adviser to see what steps you can take in your situation to begin getting back a positive credit rating, and pursue being a homeowner again.

One thing to beware of are so-called “foreclosure prevention” companies, or “foreclosure recovery” scams. Avoid them at all costs! Don’t trust your homeownership to a sign you saw stapled to a telephone pole. If you feel you may be in jeopardy of a foreclosure, here are a few tips:

1. Stay in communication with your lending institution. Let them know about your situation as soon as possible, and work with them. In most cases, they would rather have you be able to pay off your house than to pursue the route of a foreclosure. Don’t ignore the problem, and always respond to their communications as well.

2. Make your mortgage payments your first priority. Get financial advice from a reputable professional. Develop a sound strategy to pay off bills, eliminate unnecessary expenditures, and prioritize them.

3. Read the fine print of your mortgage loan carefully! This is especially true before you obtain a mortgage loan. But it is equally important to know your rights and responsibilites when the threat of foreclosure comes knocking on your door, so to speak.

4. If you live in the United States, become acquainted with the U.S. Department of Housing and Urban Development, otherwise known as HUD. There are HUD-approved housing counselors available. As their website states, they “fund free or very low cost housing counseling nationwide.”

– Fact Frenzy

Sources: HUD.gov – Tips for avoiding foreclosure , Fizber.com – Definition


Author’s note: This article is intended for general information only, and is not intended to advise any course of financial action, or to provide financial advice. For financial advice, please consult with professional financial counsel.

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