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There has been so much talk this year about foreclosures and it seems like most people really don’t understand the foreclosure process.  There is also an alarming mindset right now in that a lot of people seem to be willing to just throw up there hands and say “I’ll just give it back to the bank.”  The thing here is that the bank never bought the house.  So, it’s not “giving it back.”  You bought the house and agreed to pay the bank loan back over time.  It’s more like not living up to your obligations.  I guess that’s a whole different issue (oops, seems like my banker side is showing a bit).

Anyway, foreclosure is a very serious issue.  You want to avoid being foreclosed on at all costs because of the severe damage to your credit history and credit score.  A foreclosure can stay on your credit report for up to 10 years and can lower your credit score by 100 points and more.  Your credit score is used by credit card companies, auto lenders, insurance companies and many others to determine the rates you’ll be required to pay.  So, a low credit score is going to cost you money in many other areas of your life for a long time to come.  Of course, you’re going to be unable to get new mortgage money for a minimum of 2 years (and only then if the rest of your credit is perfect) and generally not for at least 4 years.  Probably the most important reason is that being foreclosed on, and losing the house, is a terrible experience for a family to go through.

In Michigan there are two ways to foreclose:  by lawsuit or by advertisement.  The standard mortgage document used by lenders in Michigan contains a “Power of Sale” clause that allows foreclosure if there is a breach in the terms of the loan and this clause makes foreclosure by advertisement possible.  This is easier than filing a lawsuit, so almost all foreclosures in Michigan are by advertisement and that’s what we’ll cover here.  The basic process goes like this:

1. Homeowner is 90 days past due on their mortgage payments.  Any time you’re late on your mortgage payment it’s technically a default, but generally a lender would not foreclose until you are at least 90 days late.
2. Notice of Foreclosure Sale is published.  The notice must be published once a week for 4 weeks in a newspaper that circulates in the county where the property is located.  The notice must also be conspicuously posted at the property and the lender has a right to enter the mortgaged premises for this purpose.  The sale is typically 30 days after the notice is given to borrower.
3. Homeowner’s Rights at this Point.  The borrower can cure the default and keep the existing financing prior to the sale if they pay all of the payments that are past due prior to the sale date.  They could also sell the house and pay the loan off in full (or ask for a “Short Sale” – another topic for another discussion).
4. Sheriff’s Sale.  The sale is handled by the circuit court and is called a sheriff’s sale.  It’s an auction and the house is sold to the highest bidder.  The lender will buy the property at this time unless an outside bidder offers more than what is owed on the house.  This is unlikely and in most cases the bank owns the house.
5. Sheriff’s Deed is recorded.  A deed is recorded transferring the title to the bank.  The amount of the sale is typically the principal balance of the loan plus interest, late charges and legal and court costs.
6. Redemption Period.   The rules can vary, but in most cases the redemption period is 6 months (this can be reduced by the court to as little as 30 days if the property is abandoned).  During this time the homeowner may continue to occupy the home (no payments are made) and has a right to redeem the property by paying the full amount of the sheriff’s sale plus interest at the rate of the original mortgage.  This could be done by getting a new mortgage (not likely in today’s mortgage world) or by selling the home for at least the amount needed to pay off the sheriff’s deed and interest due.

It’s a long and arduous process which puts a lot of stress on the homeowner.  If you are having trouble making your house payments the best thing to do is to be honest about it with your lender.  Call them and be prepared to explain your situation in detail.   The bank does not want to foreclose so they are generally willing to try to create a workout plan.  If you’re having trouble making your house payment the best thing to do is to face up to it early and you can probably work things out!

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Written by Ken Mascia
Oxford Financial, 248.644.1200
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