What is a foreclosure? How it works and how to avoid it
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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.
- Foreclosures occur when a lender takes control over a property from a borrower for failing to make payments
- Foreclosures may occur by court order or not, depending on the state the home is located in
- There are several indicators that come before the foreclosure, including notice of default
- Foreclosures take 2.5 years to complete on average, but can take up to seven years
- Foreclosures can damage your credit score and result in loss of property
What is a foreclosure?
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.
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.
Types of foreclosure
After you have several missed mortgage payments, your lender can start the foreclosure process. There are two main ways 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.
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 in 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. Each state has its own laws pertaining to the process of foreclosure and foreclosure sales. These can govern the borrower’s relief options if already in foreclosure, how to go about posting a Notice of Sale, the sale timeline and other parts of the process.
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.
A Notice of Default could show up on your credit report and affect your score. This can make it more challenging to obtain other types of credit or refinance your mortgage.
A Notice of Default doesn’t equate to the lender immediately or automatically foreclosing on your home, and it doesn’t mean you don’t have options to prevent the foreclosure from happening. You can put a stop to the proceedings by getting current on your payments.
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 might 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. Depending on laws in your state, you might have the ability to exercise right of redemption (meaning you can reclaim your home) up until the foreclosure sale, or even after.
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 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 948 days, or about two-and-a-half years, as of the first half of 2022, according to ATTOM Data Solutions. In some states, the foreclosure process took four years, and some took nearly seven years.
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.
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 mortgage lender or servicer. It is unlikely that your lender will let you off the hook completely, but it can help you take action so you do not lose 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 might 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. Your lender can probably set up a payment plan that involves more frequent, but lower payments, or deferral for a month or two.
Consequences of foreclosure
There are several financial consequences to foreclosure, and they can be devastating. For one, getting a mortgage after foreclosure can be challenging because of the impact on your credit and the fact that you’ll likely be subject to a waiting period before having a chance at a new loan. The other implications of foreclosure include:
- Losing your home, which puts you in the position of having to find a new place to live with a foreclosure on your record
- Damage to your credit, since a foreclosure stays on your credit report for seven years
- Losing your property and equity, which can have far-reaching impacts on your overall wealth
- Owing money on the remaining balance if it’s a judicial foreclosure, and being subject to litigation, wage garnishment and more if you can’t pay
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.