According to financial website, Bankrate, the 2018 U.S. Foreclosure Market Report shows that national foreclosure rates are currently at their lowest since the Great Recession. However, the threat of foreclosure is still a reality that many homeowners face, and a situation that no homeowner wants to find themselves in.
If you're in the market for a new home or investment property, however, the foreclosure process provides you with an excellent opportunity to secure a home at better terms than you could through more conventional buying processes. There are certain circumstances where home hunters can take over house payments in foreclosure, providing relief for homeowners and resulting in good deals for buyers.
The Foreclosure Process
Long before a home is foreclosed upon, the homeowner has to have defaulted on the loan, or failed to make the required monthly mortgage payments. One missed payment does not automatically equal default with most lenders, and homeowners are generally given a grace period to help weather financial hardships or setbacks, and to catch up on payments. However, this does not mean that the lender will leave you alone during this missing payment phase – quite the contrary. Homeowners can expect to receive calls and other correspondence from their lender demanding payment or offering alternatives.
If a payment or other arrangement is not made, then the owner will receive a notice of default from their lender. But, even after homeowners receive a notice of default, this typically gives them 90 days to rectify the situation or remit any missed payments. The notice of default is also the start of the formal foreclosure process, but there is still time to save the home. Homeowners can reinstate the mortgage by making up all missed payments in addition to any interest or lender fees levied for being late.
Should the homeowner not be able to come up with the money needed to reinstate the mortgage, then the lender will likely continue with foreclosure and issue a notice of sale. The notice of sale alerts the owner by certified mail of the impending sale of the property within 21 days. Homeowners have five days before the auction date to try and pay the past due amount, if they have the funds available. In the event these five days pass with no mortgage reinstatement, the home is then sold to the highest bidder whereby the new owner will serve the old homeowner with a three-day written notice to quit, or leave the premises, if they have not already done so.
What Is Preforeclosure?
There are several steps in the foreclosure process, but there is only a small window of time to acquire a property from a homeowner in the preforeclosure stage and take over mortgage payments before foreclosure. In the preforeclosure phase, the homeowner has fallen behind on mortgage payments and likely has received a notice of default, or the lender has brought forth a lawsuit to initiate the official foreclosure process. At this stage the bank is not involved in the sale of the property and potential homebuyers looking to take over a mortgage can approach a defaulting homeowner and make an offer.
How Does an Assumable Mortgage Work?
Mortgage assumption is a transaction that allows someone to take over responsibility of an existing loan. Once the property is transferred, or sold, the new buyer then takes over the original loan and begins to make the monthly payments of said loan. Everything with the existing loan remains the same, and the new borrower has to comply with all the terms and conditions, such as interest rate, repayment period and principal balance as well as the monthly payments of the original loan.
But keep in mind, not all mortgages are assumable. Especially if the mortgage agreement specifically states that it isn't. Some mortgage contracts fail to mention whether or not a mortgage is assumable. In such a case, the mortgage would be considered assumable in most states. Also, new buyers will have to qualify for the new mortgage, just as the original borrower had to, so expect to have your credit checked in addition to supplying proof of employment and income verification.
Sometimes a mortgage may not be assumable because of what is known as the "due-on-sale" clause. This provision states that in the event the property is transferred to a new owner, the full balance of the loan will become immediately due. Because the transfer or sale of the home would trigger this provision, mortgages containing this clause would not be assumable.
There are, however, situations where the due-on-sale clause does not apply. Transferring the property from parent to child, to a relative when the borrower dies, transfers between spouses and transfers that occur as the result of a divorce are all examples of exceptions to this provision.
Assuming a Mortgage
Once you have determined that the mortgage is in fact assumable, then in order to stop the foreclosure proceedings, you will have to remedy the default. This can be done by paying the full amount owed, or reinstating the loan. You can also reach an agreement to set up a repayment plan with the lender, or loan modification, that will give you more time to pay any past-due amounts and bring the loan up to current.
Once you have qualified for and assumed the mortgage, typically the original borrower is released from his responsibility to repay the loan. But, this is not always the case, and sometimes the original homeowner could be held liable if the loan defaults in the future. The rules vary by state, so it's a good idea to familiarize yourself with your state and local laws that may apply in your particular case.
Finding Preforeclosure Properties
Finding preforeclosure properties may be easier than you think. Thanks to the internet and online services that compile data on properties that are heading down the path of foreclosure, you can quite easily locate homeowners in distress. These online services generally charge a monthly fee to gain access to the data, but all the information comes from public records that you could search yourself, if you know what to look for. The problem with assuming a mortgage isn't finding homeowners in distress – it's how receptive they will be to your offers.
Homeowners facing foreclosure are likely to be stressed out from the notices from their lenders, trying to come up with enough money to take care of their defaulting loan and offers from would-be investors or buyers seeking to seemingly profit off of their misfortune. So, don’t expect all homeowners to welcome your offers with open arms, they’re probably overwhelmed and may not be receptive to anything you have to say, but this doesn't mean you should give up.
Some homeowners just want out of the loan, and if you do find a homeowner who is willing to negotiate the assumption of their mortgage, then you can get a good deal. Savvy negotiators can work out an offer that both relieves the current owner of his foreclosure woes, while hopefully finding a property that is worth more than the owner owes on the loan. That's a win win for both parties.
- NOLO: Avoiding Foreclosure – Can Someone Else Assume (Take Over) the Mortgage?
- NOLO: Buying a House in Preforeclosure
- Bankrate: Foreclosure Rates Haven’t Been This Low Since Before the Great Recession
- LegalMatch. "Foreclosure Alternatives." Accessed June 20, 2020.
- Cornell Law School Legal Information Institute. "Foreclosure." Accessed June 20, 2020.
- NOLO. "Homeowners’ Associations (HOAs & COAs)." Accessed June 20, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed June 21, 2020.
- U.S. Department of Housing and Urban Development. "Are you at risk of foreclosure and losing your home?" Accessed June 21, 2020.
- Cornell Law School Legal Information Institute. "Equity of Redemption." Accessed June 21, 2020.
- FindLaw. "Regaining Ownership After Foreclosure: Statutory Redemption." Accessed June 21, 2020.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.