Losing your home to foreclosure is probably one of the hardest things you can experience. This is even more painful when the house was founded on your hard work. However, there are times when you can’t avoid the situation due to sudden or unexpected circumstances. Missing or being late on your payments, emergency situations, and many others are among the reasons why you can lose your home to foreclosure, and any funds in escrow. However, before it can spiral down into a disaster, there are ways in which you can avoid all that.
What is an Escrow?
An escrow is basically a financial agreement where a third party regulates and holds payment of funds for two parties involved in a transaction. Basically, they make sure that the transactions are secured by keeping the payment in an escrow account. This is then released when all of the terms in the said agreement are met as overseen by an escrow company.
What is Foreclosure?
Foreclosure is the process in which a lender is able to take control of a house or property, evicts the homeowner, and sells the house once the homeowner is unable to make full principal and interest payments on his/her mortgage as agreed in the mortgage contract. All of which are done legally and by law.
The process for each foreclosure varies within every state. This is because each state has their own laws regarding foreclosure process. These include: sending notice by lender, giving options to the homeowner in order to avoid foreclosure, as well as the timeline of the processes including the selling of the property.
Types of Foreclosures in Different States
In the United States, different states have different foreclosure laws to follow. Among 22 states including Illinois, New York and Florida, a judicial foreclosure is applied. A judicial foreclosure means that the lender should go through the courts to get permission to foreclose. However in order to do that, they must first prove that the borrower is delinquent. If this is approved, it will be the local sheriff who will auction the house to the highest bidder in the attempts to recoup what the borrower owed in the bank. The entire process usually takes 480 to 700 days from the first day that the borrower missed a payment.
Meanwhile, Arizona, Georgia, California, Texas and including 28 other states use non-judicial foreclosure to get the property. This is also called the Power of Sale which is faster compared to judicial foreclosure. The process does not involve any court, as it is the lender who has the right to foreclose the house. In many cases, the lenders are the ones who adjust the repayment schedule so that they can afford the payments and retain the ownership of the house. This process is also known as a special forbearance or what they call mortgage modification.
What Happens to Your Escrow When Your House is Foreclosed?
When a house is foreclosed, lenders will use any leftover funds in the borrowers’ escrow accounts in order to pay property taxes and homeowner insurance. Legally, they cannot sell a foreclosed home if the bills are not paid. If by chance there is money left in the escrow account, the lender will use it to help reduce the mortgage debts that they still owe. However the former owners will not receive any escrow refund.
Advantages and Disadvantages of Using Escrow
- If you don’t have an escrow account, you are obligated to save for your mortgage as well as homeowner’s insurance premiums and property taxes.
- Escrow accounts help stretch out the big bills like insurance premiums and taxes by allowing you to pay them over 1 year/12 months by including them into your mortgage payments.
- You can also earn a reduced interest rate on your loan which can help you save a good amount of money on your home loan.
- Not having an escrow account means you have to pay your mortgage premiums and property taxes by the given time. If you can’t pay, you will have a lapse in the insurance coverage. Escrow accounts help the lender become more responsible for paying the tax and insurance on time.
- With an escrow account, there is someone who can hold your annual property tax as well as homeowner’s insurance which can help generate interest income. Basically, the lender holds this account which means that you don’t generate interest income for yourself.
How to Avoid a Disaster with Escrow and Foreclosure
As I have mentioned, you cannot avoid emergencies and missed payments but there are ways that you can avoid the downward spiral of your situation. Before it gets worse, you can do a few things to avoid it, here are a few tips you can use:
- Always pay your mortgage on time. This is the only way in which you can avoid getting an escrow account and foreclosure. If you pay your dues on time then there’s no need to worry about facing foreclosure.
- Don’t ignore a missed payment. The longer you wait to do anything about it, the harder it is to recover and catch up with your payments, and you get closer and closer to losing your house.
- If you missed a payment, contact your lender as soon as possible. They really don’t want to foreclose your house and if they can, they want to help you avoid it. So contact them as soon as you can so you can see the best option to take especially when you are having a hard time financially.
- Read all the notices and mails you received from your lender. This way you have everything you need in court.
- Know your rights as a homeowner. Read your loan documents so your lender can help you with it in case you can’t meet your payments. Educate yourself about foreclosure laws within your state and contact the State Government Housing Office right away. Know your options and learn about foreclosure prevention too.
- Ask or call the US Department of Housing and Urban Development for your options and ask their advice on what you can do to avoid foreclosure. This department can provide you with all you need in case you need assistance.
- Watch what you are spending your money on. Review your finances and cut unnecessary spending.
- Use your assets – eg. Car, jewelries etc. that you can sell for cash and reinstate your loan. This will help your lender see that you are making an effort to keep your home.
Owning a house is a big responsibility, and a huge part of this is paying your monthly dues on time and in-full. If you are serious about owning a house, then you must also be serious about paying on time. This is the only way you can avoid getting foreclosed. However, if you really can’t avoid missing a payment, work with your lender as soon as you can. This way you can still find ways to recover and reinstate your loan. If you keep avoiding or ignoring it then you risk losing your house in the future. So while it’s not entirely a disaster yet, do something about it. It’s the best way to get things done and avoid a stressful situation.