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What to expect when facing foreclosure
No one buys a home intending to lose it to the bank — but that’s what can happen if you default on your loan and enter foreclosure. With foreclosure, the mortgage lender can repossess your home and sell it to satisfy the remainder of your mortgage debt.
Understanding how foreclosure works can help you avoid this potentially devastating process. Here’s what you need to know.
In this article:
What is foreclosure?
Foreclosure describes the legal action a lender can take to recoup its money after a borrower has defaulted on a loan. Under foreclosure, the lender takes possession of the property used as collateral on the loan and sells it.
The specific foreclosure process varies from state to state, so it’s essential to understand your home state’s foreclosure laws. Most lenders do not initiate foreclosure until at least a few months after the initial missed mortgage payment, and there are typically several opportunities to rectify the situation before foreclosure.
Read more: Do you have home buyer’s remorse? Here’s what to do next.
Types of foreclosure
Most homeowners may face either judicial or non-judicial foreclosure, depending on their state of residence.
Under judicial foreclosure, state law requires that your lender file a lawsuit to begin the foreclosure process. This means the homeowner can fight the lawsuit in court, but if they lose, the house goes into foreclosure. At that point, the lender will generally sell the home at auction.
With non-judicial foreclosure, the lender has included a power-of-sale clause in your mortgage contract. This clause authorizes the lender to initiate foreclosure proceedings if the borrower defaults on the loan. The lender is not obligated to file a lawsuit or involve the courts, although it must follow the foreclosure steps outlined by the state. Non-judicial foreclosures tend to be faster and less expensive than judicial foreclosures.
However, homeowners in Connecticut and Vermont may instead go through a foreclosure process known as strict foreclosure. Under this rare type of foreclosure, the mortgage lender files a lawsuit against the defaulting homeowner. If the owner can’t pay the mortgage before a court-ordered deadline, ownership of the property reverts back to the lender. Typically, strict foreclosure is only used when the amount owed on the mortgage is greater than the total property value.
Learn more: What to do if you’re underwater on your mortgage
The foreclosure timeline
The foreclosure timeline may vary depending on where you live and whether you’re going through the judicial or non-judicial process. But nearly all foreclosures will follow this general timeline.
Initial default
Thirty days after you miss a mortgage payment, your loan is now in default. This will prompt the lender to contact you by letter or phone. Lenders are usually willing to work with borrowers at this point in the process. If you are facing financial difficulties, you may be able to negotiate a partial payment or other payment modification until you get back on your feet.
Demand letter
After missing three consecutive payments, your lender will send a demand letter (also called a “notice to accelerate”). This letter states that you are now delinquent on your mortgage and gives you 30 days to make your account current.
Lenders are generally still willing to work with borrowers even after sending the demand letter. If you cannot pay the full amount to bring your mortgage current, you may still be able to work out a deal with your lender to make payments over a longer timeframe than 30 days. Your mortgage lender wants to avoid foreclosure as well, so it’s important to talk openly with your loan officer.
Notice of default
In states with non-judicial foreclosure, your lender may file a notice of default (NOD) once your mortgage is several months past due. The lender files this document with the county recorder’s office. This NOD is the public record showing the borrower is in default, and it includes information about the borrower, the address of the mortgaged property, a description of the default, the necessary action to cure the default, and the deadline for curing the default.
The notice of default will also include a statement about how the lender intends to sell the property if the default is not cured by the deadline. Even after the NOD is filed, it is still possible to either pay the amount you owe or negotiate a payment plan with your lender to avoid foreclosure.
Trustee’s sale
Next, the lender will schedule the public trustee’s sale, also known as a sheriff’s sale. Once the sale has been scheduled, you still have time to avoid foreclosure. Until the date of the sale, you can still work with your lender to cure the default or make arrangements for a payment plan.
The trustee’s sale is a public auction. In addition to the written notice you receive about the auction, these sales are often advertised locally. On the day of the foreclosure auction, the property will be awarded to the highest bidder.
Redemption period
Even after the auction is completed, you may still be able to reclaim your property via a process known as redemption. The redemption period is a short window of time during which you have the opportunity to purchase back your property by paying off the outstanding balance on the mortgage plus all costs associated with the foreclosure.
The redemption period's specific rules vary depending on your state’s foreclosure laws.
Eviction
If you do not pay off your balance and fees during the redemption period, you must vacate the property once the new owner has taken possession of the house. The amount of time you have before moving out will depend on your state’s laws and the new owner.
Learn more: How a short sale can help you avoid foreclosure
Foreclosure FAQs
How can I avoid foreclosure?
If you are struggling to pay your mortgage, contact your lender as soon as possible. Lenders also want to avoid foreclosure and often have programs and other options available to help borrowers in financial distress. If you have already missed a payment, do not ignore any contact from your lender and ask about payment plan options to help you avoid foreclosure. The company might approve you for a loan modification or talk about refinancing options. Borrowers can also contact housing counselors approved by the U.S. Department of Housing and Urban Development (HUD) for assistance. These free and low-cost counselors can walk you through your legal options, help you organize your finances, and represent you when negotiating with your lender.
How many months after a missed payment does the foreclosure process begin?
Typically, borrowers must be three to six months behind on their mortgage payments before lenders start the foreclosure process. However, your lender will contact you after the first missed payment. Talking to your lender as soon as you realize you can’t make a payment will help avoid foreclosure.
Do lenders want to avoid foreclosure?
Yes, lenders would prefer for borrowers to bring their mortgage current rather than initiate foreclosure, even if it takes time for the borrower to do so. This is because foreclosure can mean lenders lose out on the months of mortgage payments, may have to pay legal fees, and might not recoup all the money they have lost. It is generally cheaper for lenders to help you find a way to make your mortgage current.
This article was edited by Laura Grace Tarpley.
