Involuntary Foreclosure

An involuntary foreclosure happens when a borrower has defaulted on their mortgage loan and the lender initiates the proceedings to take possession of the property. Unlike a voluntary foreclosure, the borrower generally remains responsible for the remaining balance, no matter how much is owed after the bank sells the property.  

Involuntary foreclosure usually occurs as a last resort for borrowers who are unable to meet their monthly mortgage obligation. Regulations vary by state on how many payments a borrower must be behind on before proceedings can begin, but foreclosures are generally initiated after 90 days, or three missed mortgage payments.

With a voluntary foreclosure, a borrower is typically involved in the process and has offered to make some concessions to the lender to receive credits towards missed payments, and in cases like the Cash for Keys program, an actual cash payout.  Borrowers who are party to a voluntary foreclosure are also not usually responsible for the deficiency balance, unlike borrowers in an involuntary foreclosure.

Any borrower facing foreclosure should reach out to the servicer of their loan. The sooner they begin the process of trying to get help, the faster they can review and consider their options. Many lenders will work with borrowers to try and keep them in their home. Foreclosing on a property is very costly for banks, especially when the real estate market is stagnant. Vacant homes can sit for some time before finding a prospective buyer, and during that time the lender is responsible for maintaining the property, paying the real estate taxes and in some cases making repairs to any property damage that may have occurred.

There are many options available these days for borrowers facing foreclosure. Programs like mortgage modifications, where payments terms are altered when a borrower has experienced a financial hardship since the purchase of their home, experienced a rise in popularity after the housing crash. Forbearance agreements are another option in the event of a temporary hardship.

If a borrower hasn’t yet defaulted, they can try and qualify for a refinance. This may allow them to receive cash out needed to pay down other bills or take advantage of lower interest rates.  

Borrowers whose properties are in fair to good shape may attempt to be approved for a short sale. A short sale process must be approved through the lender, who agrees to accept less than what is owed on the property. It's sometimes in the lender's best interest to receive a partial payoff of the loan instead of having to incur legal fees during a foreclosure, especially when they may end up having to auction the property off at an even further reduced rate.