What is the foreclosure process?

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If you miss 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 bought your home, you agreed to a deal with your bank or lender: They gave you the financing upfront to pay for the home, and you agreed to pay a specific amount each month for a set number of years. If you fail to keep up with the mortgage payments, the bank or lender can sell the property 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. Even though you call the property home, if you have a mortgage, the bank or lender technically owns the property until you make your final mortgage payment.

So, if you’ve fallen behind on your mortgage payments — even if it’s for a reason out of your control, like medical bills, job loss or some other unexpected financial crisis — your lender has the right to the property.

After several missed payments, your lender can start the foreclosure process. This can be either:

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

The foreclosure process

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 can vary by state, but generally include:

Step 1: Missed mortgage payments

If your mortgage payment is a few days late, don’t worry just yet — your lender may have a grace period of up to two weeks for you to make your payment.

After the grace period, however, your payment is considered late and you’ll be charged late fees. You are also likely to hear from your lender during this time.

Step 2: Notice of Default

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

Step 3: Pre-foreclosure

This 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.

You may also be able to sell your home to pay back the amount owed to your lender; this 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 to try to make back the money owed to them. Your house will be 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 may 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 find a new place to live.

What to do if you’re facing foreclosure

If you anticipate that you may miss a mortgage payment — or if you’ve already missed one — don’t just hope that your lender won’t notice or that you’ll be in a better financial situation next month.

“The best thing a customer can do when they think they may have challenges making their mortgage payments — even before they actually miss a payment — is to contact their servicer,” says Tom Goyda, senior vice president of Consumer Lending Communications at Wells Fargo.

Your mortgage lender may be able to help. Wells Fargo, for example, has several options available to borrowers to address both short-term and long-term financial challenges.

As Goyda explains: “We need to talk with them directly to understand their circumstances and identify the best way to help them. The earlier we can start to work with them, the better.”

Your lender may offer a mortgage repayment plan or a loan modification, or even a short sale, depending on your situation.

Keep in mind that the federal government extended the foreclosure moratorium until at least Aug. 31, 2020, and lenders are also trying to accommodate customers impacted by pandemic. At Wells Fargo, customers are being granted a three-month payment suspension if they request assistance.

“For customers who contact us, we won’t report suspended payments as past-due to the consumer reporting agencies or charge late fees for payments not made during the suspension period. And we won’t foreclose on any customer who is in forbearance,” Goyda says.

The bank has also temporarily stopped all foreclosure-related activity, except if court-ordered.

Bottom line

Your best bet to avoid foreclosure is 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. If you think you won’t be able to pay your mortgage next month, make it a point to talk to your lender as soon as possible.

Featured image by HaizhanZheng of Getty Images.

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