What is foreclosure and what is the process involved?
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Foreclosure might be an American term that’s crept into the Aussie vernacular, but the concept is very much a reality across the Australian property market.

Foreclosure is used to broadly describe what happens when a home owner stops making mortgage payments to their lender, forcing the sale of the asset, so the lender can recover its money.

Technically speaking, with foreclosure, the lender goes through the legal process of removing the borrower from the property title and putting themselves on the title before selling.

But in Australia, lenders instead use “mortgagee in possession”, a legal process where the lender gets a court order to possess a property, but the home owner technically still owns the property and remains on the title deed. However, the lender has the legal right to sell it.

Either way, foreclosure is serious business and sees a home sold from under the once-owner.

Front white door with stain glass window panel hall entranceway with hall stand

Foreclosure is when a bank acts to recover money they are owed. Picture: realestate.com.au/buy

Phases of a foreclosure

There are several phases of foreclosure or a mortgagee in possession process. Here’s what happens.

1. Missed loan repayment

The process begins when a borrower misses a loan repayment. The lender will call, email and write to the home owner to urge them to get back on track, but if payments don’t resume after 90 days, the mortgage is declared delinquent debt or an impaired loan.

2. Default or demand notice

The next step sees the lender issue a default or demand notice, which is a formal notice or demand filed in court. The notice must comply with the National Credit Code and clearly give the home owner an opportunity to pay.

The notice provides exact details of how much is owing and how and where to make payments, to cover all legal bases for the lender. Generally, the home owner will have 28 days to make a payment from the date the notice is issued.

3. Bank declares mortgagee in possession

If the home owner doesn’t make a payment within the 28-day timeframe, the bank then has the right to go to court to declare “mortgagee in possession”.

This is filed in the registry in the state where the property is and the lender asks the court for a judgement for the whole amount of the mortgage, as well as an order for the possession of the property. This gives the bank the right to take control of the property physically.

The order is stamped by the court and given to a process server or commercial aid, who physically “serves” the court documents to the home owner.

4. Home owner can offer defence

After being served, the home owner has 28 days to file a defence.

If no defence is filed, the bank will approach the court with paperwork and seek a default judgement. Due to the lack of a defence, a default judgement bypasses a court hearing and the judge will make an immediate order allowing the lender to possess the property.

5. Property repossessed

The court order, delivered to the home owner, gives four weeks’ notice of the bank taking over the property.

Once the notice period ends, a representative of the bank, the sheriff and a locksmith will repossess the home. All locks are changed and notices are put on the inside of all doors and windows.

In cases where the home owner is still present, the sheriff has the legal right to physically remove them from the property. Removalists will also be sent in to remove any furniture remaining in the home and the bank will prepare to sell the property.

Home owners have 28 days to file a defence once a bank declares mortgagee in possession. Picture: Getty

How does a foreclosure affect your credit score?

As Australia has comprehensive credit reporting rules, lenders report everything, down to a late loan repayment, to credit agencies. That means a foreclosure or mortgagee in possession action can massively reduce a person’s credit score.

A credit score, sometimes referred to as a credit rating, is used by lenders as a guide for how responsible a person is with money and whether they qualify for a home loan. In Australia, it’s usually a rank between 0 and 1200, depending on the credit agency.

Losing a property to foreclosure can drop it up to 300 points. This can have a number of impacts.

1. Kill borrowing power

A foreclosure can see a “good” credit score of 800 drop to 500, which can all but kill a person’s ability to borrow money from banks and lenders for things like a mortgage or car loan. This means it may be impossible for the person to get a loan.

2. Very high interest

Some lenders may offer a loan to someone with a lower credit score, but it comes at a price. Any loans provided are generally tagged with much higher interest rates, because the financial provider considers the person high risk. This makes borrowing money very expensive.

Can you buy a home after a foreclosure?

A credit score is one of the key things lenders use to decide if they will give someone a mortgage. Because going through a foreclosure drops a credit score significantly, it can sometimes make it impossible to get another mortgage.

Can you stop a foreclosure?

Generally speaking, banks and lenders want to avoid possessing or selling a home and will negotiate with home owners, so it’s worth approaching the bank to see if there is chance to negotiate a deal.

Banks have been known to take “cents on the dollar” from home owners and waive the remaining debt, in good faith. Experts say as long as an open line of communication has been established, there’s always an opportunity for a home owner to avoid the issue. You should always speak to a financial advisor to ensure you get the best advice for your personal situation.


Reference:- https://www.realestate.com.au/


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