What is a foreclosure? How do foreclosures work?

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If you fall behind on several mortgage payments, your lender may begin the foreclosure process, which can lead to months of financial and emotional stress, and even result in the loss of your home.

What is a foreclosure?

Foreclosure definition

A foreclosure is when a lender takes control of a property after the borrower misses several mortgage payments.

When you purchased your home and took out a mortgage, you agreed to a deal with your bank or lender. They gave you the financing upfront to pay for the home, and in return, you signed a contract agreeing to pay a specific amount each month for a set number of years.

If you start falling behind on your payments, or stop making your mortgage payments completely, the bank or lender can foreclose on the property and sell it as a way to make back the funds that were lost.

How do foreclosures work?

When you purchased your home, you signed a mortgage contract that specified the amount of money you borrowed, as well as the interest rate and the details about your monthly payment.

However, simply living in your home does not mean that you legally own it. If you have a mortgage, the bank or lender technically owns the property until you make your final mortgage payment.

After you have several missed mortgage payments, your lender can start the foreclosure process. There are two main ways that your home can be foreclosed on:

  • A judicial foreclosure, meaning the lender needs to get a court order.
  • A nonjudicial foreclosure, depending on the state where the property is located.

If you want to purchase another home after a foreclosure, you will likely be subject to a waiting period. Getting a mortgage after foreclosure can be challenging because of the impact on your credit, but with strong financial habits, you can get approved for another loan in the future.

How long does foreclosure take?

The foreclosure process can take some time, and up to a couple of years. The average foreclosure in the U.S. took 922 days, or about two and a half years, as of the second quarter of 2021, according to ATTOM Data Solutions. In some states, the foreclosure process exceeded three years or more.

However, you are allowed to remain in your home while the foreclosure process plays out. Once the house is sold, you will be asked to vacate the property. If you refuse, you will receive an eviction notice and law enforcement will remove you and your belongings from the home.

Types of foreclosure

There are several different types of foreclosures, depending on the state and the terms of your mortgage. Some foreclosures involve legal action and others do not. The types of foreclosures include:

  • Judicial foreclosure: With a judicial foreclosure, the lender files a lawsuit and the borrower is notified of the non-payment. The homeowner has 30 days to make up the missed payments, otherwise the foreclosure process will proceed.
  • Power of sale: A power of sale foreclosure is allowed in some states if your mortgage has a power of sale clause in the contract. Once the borrower falls behind on their payments, their mortgage provider is allowed to put the house up for auction. A power of sale foreclosure is considered a non-judicial foreclosure because there is no legal action taken.
  • Strict foreclosure: Strict foreclosures are less common because they are only allowed in a few states. In this case, the mortgage lender files a lawsuit against the homeowner, and if the borrower does not make up their payments within the court-ordered time period, the home can be seized by the mortgage holder.

The foreclosure process: 5 steps

From the time of your first missed mortgage payment to the foreclosure sale of your home, there are several steps in the foreclosure process. These phases can vary by state but generally follow this timeline.

Step 1: Missed mortgage payments

If your mortgage payment is a few days late, you are probably not at risk of foreclosure. Your lender may have a grace period of up to two weeks for you to make your payment, without serious penalties. After the grace period, however, your payment is considered late and you’ll be charged late fees. You might also receive a warning from your lender about a potential foreclosure if you fail to make the payments.

Step 2: Notice of Default

After three to six months of missed mortgage payments, your lender will file a Notice of Default with the local recorder’s office. Your lender will also send one to you via certified mail, and depending on your state, might post the notice on your front door. This notice specifies how much you owe in order to bring your mortgage back into good standing.

Step 3: Preforeclosure

Preforeclosure is the time period between the Notice of Default and the auction or sale of your home. During this time, if you can get your hands on the amount specified in the Notice of Default, you’ll be able to stop the foreclosure process from going any further. The exact amount of time you have depends on your state. During preforeclosure, you may also have the option to sell your home and pay back the money owed, in what is called a short sale.

Step 4: Notice of Sale

If you don’t have the money to bring your mortgage into good standing within the allotted time frame, your lender will file a Notice of Sale, and your home will be placed up for auction at a specified time and location.

How the Notice of Sale is published depends on your state. For example, in North Carolina, the notice must be published in a local newspaper and posted on the door of the local courthouse, while in California, it must be posted on the property as well as a public place in the county.

Because the Notice of Sale is public information and has been advertised, several buyers, including investors, might be interested in buying your home.

Step 5: Eviction

Following the auction and sale of your home, you’ll generally have a few days to gather your belongings and move to a new residence. If you do not voluntarily move out, law enforcement personnel are legally allowed to remove you and your belongings from the premises.

How to avoid foreclosure

Facing home foreclosure can be extremely scary. Fortunately, there are plenty of ways to avoid foreclosure, even if your current financial situation is making it difficult to pay your mortgage on-time.

Ultimately, avoiding foreclosure starts by communicating with your lender. It is unlikely that your mortgage provider will let you off the hook completely, but they can help you take action so you do not risk losing your home.

Here are some of the best ways to avoid a home foreclosure:

  • Take advantage of forbearance programs: During the COVID-19 pandemic, the federal government established a mortgage forbearance program that has since expired. However, you can still apply for forbearance if you have a federally-backed loan from Fannie Mae or Freddie Mac.
  • Adjust your loan terms: If you are struggling to afford your monthly loan payment, ask your lender if they can adjust the terms of your loan. In exchange for a longer amortization schedule, you may be able to lower your monthly payment.
  • Get a deed-in-lieu of foreclosure: Some states allow homeowners to choose a deed-in-lieu of foreclosure, in which you agree to turn over your home to a lender in order to avoid a foreclosure. With this option, you are not required to pay your mortgage, but you might still be responsible for paying the difference between your home’s value and the mortgage balance.
  • Set up a repayment plan: If you know that you are unable to make your mortgage payment for a given month, let your lender know as soon as possible. They can probably set up a payment plan that involves more frequent, but lower payments, or deferral for a month or two.

Bottom line

If you’re struggling to make your mortgage payments, your best bets to avoid foreclosure are time and communication. As soon as you realize you can’t pay your mortgage, reach out to your lender or servicer to learn about the options available to you. They might be able to set up a payment plan or allow you to defer the payment for one month if you have a temporary financial hardship.

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Written by
Diane Costagliola
Contributing writer
Diane Costagliola is a contributing writer for Bankrate. Diane writes about homebuying, loans and personal finance.
Edited by
Mortgage editor
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