The coronavirus has undoubtedly taken a toll on the lives of a lot of homeowners. Businesses have been shut down, people have lost their jobs, times are getting harder as the days go by. The risk of foreclosure is looming and a lot of homeowners are in a state of dilemma. We are aware of this and would love to help in any way possible. In this blog, we will educate you on the process of foreclosure in Massachusetts and how you can get the most out of this unfortunate situation. Before we dive into this, we will talk a little bit about foreclosure.
What is Foreclosure?
In simple terms, foreclosure is a legal process implemented by lenders in which they compel borrowers to sell the assets they used as collateral for the loan in an attempt to recover outstanding loans.
In real estate, a foreclosed property is a property that belongs to a bank, seized from homeowners who were unable to complete the payments of the loans collected from the bank.
What is Pre-Foreclosure?
Pre-foreclosure is defined as the legal situation a property homeowner faces during the early stages of foreclosure. The process starts as soon as the lender files a notice of default on the property after the borrower misses several mortgage payments. The reason for this notice is to inform the owner that the lender will go into legal action should the mortgage payments remain unpaid. In this scenario, the owner is faced with two decisions; sell the property before foreclosure or meet up with the mortgage payments.
What Are My Rights During a Foreclosure?
Foreclosure laws differ from state to state in the US. Recently, Massachusetts passed a new law on foreclosures. On the 20th of April 2020, a moratorium was imposed on foreclosure laws stemming from the current coronavirus pandemic. According to Law H. 4647, all non-essential evictions and foreclosures were prohibited for at least 120 days effective on the said date or 45 days after the COVID 19 emergency declaration is overruled. The governor reserved the right to extend the period of this moratorium. In addition to this, the law also compelled servicers to provide a mortgage forbearance agreement for a period of up to 180 days.
How to Deal with Foreclosure in Massachusetts and The Effect on Your Credit Score
The foreclosure process in Massachusetts is nonjudicial. What do we mean by nonjudicial? This simply implies that the parties involved in the foreclosure process do not need to go through the state or judicial system to foreclose. However, under federal law, the lender or mortgage servicer is required to wait until the borrower defaults for more than 120 days on the said loan or mortgage payment before filing for a nonjudicial or judicial foreclosure. The reason for this 120-day period is to allow sufficient time to check out loss mitigation strategies. We will discuss some of these strategies in the succeeding paragraphs.
1. Meet Up with The Payments on Your Loan
This is a straightforward solution. Borrowers who meet up with the payments and pay all the outstanding fees should be out of the foreclosure process in no time. Once this is done, you can then proceed with the regular payments. This strategy will affect your credit score as it will display several late payments on your credit history. However, the impact is not as intense as the impact of some of the other options.
2. Apply for a Loan Modification
This is another strategy lenders may apply to get out of the pre-foreclosure process. In this case, the banks may decide to modify your loan in an attempt to keep you from defaulting. A loan modification is defined as an agreement in which the lender agrees to grant the borrower an extension, reduce monthly payments, lower the interest rates, or add the extra outstanding monthly payments to the end of your loan. This strategy doesn’t damage your credit score as the lender simply modifies the interest rates. With this strategy, lenders do not have to worry about evicting the homeowner and auctioning the property.
3. The Deed in Lieu of Foreclosure
The deed in lieu of foreclosure simply requires you to hand the deed of the property over to the lender. Once the lender accepts it, it gets notarized. It is worth mentioning that homeowners do not necessarily have to be in foreclosure to hand over your deed in lieu of foreclosure; however, the lender must accept it. With regards to your credit score, this strategy will negatively affect your credit with the same intensity that foreclosure will, even though it might be slightly less. Before picking this, you should consult your financial advisors. They might have valuable advice for you.
4. Sell the Property
There are two options of selling your home while you are in the pre-foreclosure process. It all depends on whether you owe more or less than the house is worth. If you owe less than what the fair market value is on the house, you can sell your house, pay off your loan and pocket any profits. If you owe more than the fair market value of your property you can sell via short sale. In this scenario, the lender has the freedom to approve the sale price to make sure they recuperate their money. This is where you either need to hire a reputable realtor or work directly with a knowledgeable real estate investor to ensure the success of short sales. Both are proficient at setting prices that appeal to the lender and will work with you to save your credit. This strategy will damage your credit score; however, the intensity is slightly less when compared to a foreclosure.
Foreclosure
In such a scenario, you follow the pre-foreclosure process and do nothing to stop it reaching a full-fleshed foreclosure. The lender will file a report to the public record and begin the foreclosure process. In Massachusetts, the foreclosure process lasts for a period of 10 to 12 months. The homeowner is evicted from the property during this period and the foreclosure damages your credit score severely.
The pre-foreclosure process provides you with ample time to decide on the loss mitigation strategy you would like to use. Foreclosure in general damages your credit score and this will affect the purchase of your second home or even subsequent homes. You need to make sure you pick the option which best suits your current situation and make a prompt decision. Working with a real estate investor could help to increase your options, avoid realtor fees and retain your dignity, knowing you sold your home yourself.