If you are a homeowner, the word “foreclosure” can strike fear deep into your heart, conjuring up scenarios of the bank kicking you out of your home and damaging your credit so you’ll never be able to buy another home.
But here’s a reality check: Yes, foreclosure is a soul-crushing process. When an owner is unable to pay the mortgage, the lender, to recoup some of its costs, assumes ownership and tries to sell the home. But few people are really familiar with how it all goes down—and so a lot of what you think you know about the foreclosure process is a myth.
We’ve rounded up the top misconceptions about foreclosure below, in the hope that they’ll help you breathe a little easier.
Myth 1: The bank wants to take your house
“The bank absolutely doesn’t want your home,” says Kyle Alfriend of The Alfriend Real Estate Group, in Dublin, OH.
Yes, the bank you have a mortgage with has a legal obligation to do everything within its power to get back the money still owed to it. “But taking your home is their absolute last option,” he says.
In fact, a bank would prefer anything over foreclosure. Why? Banks are in the business of collecting interest on loans, not owning homes. And the losses to a bank foreclosing on a property are enormous compared with other loss mitigation techniques.
“The key is to talk to the bank; don’t hide from them and don’t avoid their calls,” says Alfriend.
Just keep in mind that banks have to deal with regulations, too. If they shut down one request, keep talking to them about other options.
Myth 2: You can’t refinance with another lender
You can certainly try to refinance—which means you’ll take out a new loan to pay off the existing mortgage—to stop the foreclosure.
“These loan options are typically at higher rates, and you will need to evaluate the pros and cons, but options do exist,” says Alfriend. You will need to have a stable income and equity in the home to qualify for a new loan.
“If you can’t find a traditional lender, you likely need to find what is called a hard money lender,” says Ed Kaminsky, a real estate agent at Strand Hill Christie’s International Real Estate in Redondo Beach, CA. This option makes sense only if the equity in your home is more than the cost of refinancing.
Myth 3: Once foreclosure starts, you can’t stop it
In reality, you can try to stop foreclosure up to the moment that your home goes up for public auction at the county courthouse steps, which is the final step in a foreclosure process.
“If you reach the trustee handling the foreclosure and make up all of your back payments prior to that, you can save your home,” says Kaminsky. Again, this is a situation in which you should work with your lender to figure out your options for repayment.
Myth 4: You’re kicked out of your home immediately
Missing a couple of mortgage payments or receiving word from your lender is cause for concern, but don’t jump to the conclusion that you’re going to be evicted immediately. Owners have the legal right to remain in their home until the foreclosure process is completed. And sometimes, lenders will let you stay longer.
“About seven years ago, my first home was foreclosed on,” says Becky Beach of MomBeach.com. Beach lost her job and had no other income to pay the mortgage. “But the bank—Bank of America—let me stay in the home for a year.”
After a year, the bank told Beach she had to vacate the property within a three-month period. After that time period expired, Beach still needed some extra time in the home. “And the bank let me stay an extra month after I spoke to a manager,” says Beach.
“Most of the time the bank will extend the foreclosure process multiple times if you give them a valid reason to do so,” Kaminsky says.
Myth 5: Foreclosure ruins your credit for life
The foreclosure will live on your credit report for at least seven years. But you should be able to borrow again once you prove that you are creditworthy.
You can reestablish good credit two to four years after your foreclosure by regularly paying off a credit card or a higher-interest car loan.
“After seven years, my credit is nearly perfect,” says Beach. “And there’s no record on my credit report about the foreclosure.”
Myth 6: You’ll never be able to buy another house
Sure, your chance of getting a loan at the lowest possible interest rate is likely off the table for several years, depending on the circumstances of your foreclosure. But you can certainly buy another home.
“It’s a myth that foreclosed people can’t get another home,” says Beach. After finding a new job and saving for four months, she was able to put a down payment on another house.
“Now I live in a new $250,000 home,” says Beach.
Myth 7: Foreclosure is always a bad idea
In some cases, it can make sense to let the foreclosure happen and reset your financial life.
“This is if you have little to no equity or even negative equity in the home,” says Kaminsky.
In this case, readjusting your priorities on where you put your money is something that should be considered.
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