1. You buy a home
Purchase Price: $200,000
Down Payment: 3% = $6,000
Mortgage Loan: 97% (qualify based on credit, income and assets)
Closing Costs: $14,000
Build Sellers Concession into deal. (raise price to cover closing costs)
NEW Purchase Price: $214,000
Down Payment: 3% of $214,000 = $6,420 (rounded off to $6,500)
Borrow Money (97%) from a lender: $207,500
$207,500 @ 5% interest for 30 years = $1,113.90 per month
2. You sign two very important documents at closing
Mortgage: Collateral for Loan by signing a mortgage you agree as a condition of the loan to pledge your house as collateral for repayment of borrowed monies. This document is signed, notarized and recorded in county clerk’s office as a lien on property. When you give a mortgage to bank, you are the Mortgagor or Borrower. When the bank receives the mortgage from you, they are the Mortgagee or Lender. If you do not pay the loan back according to the terms of the note that you signed, the mortgagee can foreclose on the loan and sell your house to recoup their borrowed funds. In NY and most other states this process is known as Judicial Foreclosure and must be done through the court system.
Mortgage Note: Evidence of Debt
By signing a mortgage note you personally guarantee, as a condition of the loan, to pay X amount of dollars per month @ X amount of interest for X amount of years until loan is paid in full and a Satisfaction of Mortgage is recorded.
Example: Borrow $207,500 @ 5% interest for 30 yrs = $1,113.90 per month. If you don’t pay the bank according to the terms of your mortgage note, the bank can foreclose on mortgage. If the bank sells house at public auction and doesn’t get all monies borrowed back, they can personally sue you for the difference, known as a Deficiency Judgment.
Non-payment is the primary reason for foreclosure, but the lender can also foreclose due to:
B. Delinquent Property taxes (superior lien that can wipe out a mortgage)
C. Non-Payment Homeowner’s Insurance (endangered collateral)
D. Non-payment Flood Insurance (endangered collateral)
E. Enforcement of Due On Sale clause (non-assumable loans require lender consent for any deed transfers)
3. Something happens
- ARM adjusts payment beyond budget
- Death of breadwinner
- Loss of job/income
- Sour business deal (own business or stock losses)
- Underwater mortgage
- Non-paying tenants
4. You stop paying loan
- Day 10-15: Exceed grace period
- Day 16: Late fee assessed, “friendly reminder letter” sent
- Day 30: Credit bureaus notified
- Day 45: Mortgage collectors
- Day 60-90: “threatening reminder letter” sent, late payment fees accruing, arrears building, mortgagor digging a hole.
- Day 90-180: Demand Letter The lender accelerates debt and sends a certified demand letter. By law the lender must give you a prescribed amount of time to correct the defaulted loan before they can sue you in court for non-payment. To stop foreclosure you must pay the entire balance due and payable, with interest and late fees.
- Day 180-365: Lis Pendens filed in court. If you do not pay the entire balance owed as referenced in the lender’s demand letter, you will be referred to lender’s legal department and foreclosure proceedings will commence. The lender will file a Lis Pendens (Latin for litigation pending) notice with the court; allowing them to recoup monies owed by selling your house at auction to the highest bidder.
5. Advertise impending foreclosure
By law, to conduce competitive bidding, the lender must advertise the sale of your house in a local paper for a minimum of three straight weeks.
6. Lender sells house at public auction to highest bidder
7. Redemption period
Some states allow homeowners to redeem property after the foreclosure sale. The borrower has a statutory time period to redeem property by paying off entire balance of loan and court costs. In New York foreclosures are final, there is no redemption period.
If at auction house doesn’t sell at minimum bid price or above, the bank acquires legal title and the house becomes a bank owned property or REO (real estate owned). The bank’s REO department will be responsible for liquidating asset to recoup bank monies.