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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 you typically have several opportunities to rectify the situation before foreclosure begins.
Read more: Do you have home buyer’s remorse? Here’s what to do next.
Types of foreclosure
Most homeowners face judicial or non-judicial foreclosure — the type depends on your state of residence.
Judicial foreclosure
Under judicial foreclosure, state law requires your lender to file a lawsuit to begin the foreclosure process. This means you can fight the lawsuit in court, but if you lose, your house enters foreclosure. At that point, the lender will generally sell the home at auction to recoup its costs.
Non-judicial foreclosure
With non-judicial foreclosure, the lender exercises a power of sale clause in your mortgage contract, allowing it to foreclose on your home without filing a lawsuit. This can happen as early as your first point of default on your mortgage — like your first missed payment — but must follow the legal foreclosure steps outlined by your state. Your mortgage contract will outline the exact terms. Non-judicial foreclosures tend to be faster and less expensive than judicial foreclosures.
Strict foreclosure
Homeowners in Connecticut and Vermont may instead go through a legal process called 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 to the lender. Typically, strict foreclosure is only used when the amount owed on the mortgage is greater than the total property value. This is referred to as being 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. However, nearly all foreclosures will follow a general timeline.
Initial default
Thirty days after you miss a mortgage payment, your loan is in default, and your lender will notify you directly by mail or phone. During this early phase, lenders will work with you to explore solutions to bring your mortgage current. 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 sends a demand letter (also called a “notice to accelerate”). This letter states that your mortgage is officially delinquent and gives you 30 days to bring your account current.
During the demand phase, lenders may still be willing to work with you to avoid foreclosure 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 also wants to avoid foreclosure, so it’s important to talk openly about the circumstances that caused your payments to go late.
Notice of default
If you live in a state with non-judicial foreclosure, your lender may file a notice of default (NOD) once your mortgage reaches several months past due. Here, the lender files the NOD with your county recorder’s office. The NOD is a public record showing you’re in default and includes information about the borrower (that’s you), the property address, a description of the default, the necessary action to cure the default, and the deadline for curing the default.
The NOD will also include a statement about how the lender intends to sell the property if you can’t cure by the deadline. Even after the NOD is filed, it is still possible to pay the amount you owe or negotiate a payment plan with your lender to avoid foreclosure.
Trustee’s sale
If you can’t cure your default and the foreclosure proceeds, your lender schedules a public trustee’s sale, also known as a sheriff’s sale. Once the sale is scheduled, you still have time to avoid foreclosure. You can still work with your lender to cure the default or make arrangements for a payment plan until the scheduled sale date.
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 sold to the highest bidder.
Redemption period
Even after the auction is completed, you may still be able to reclaim your property through a process known as redemption. The redemption period is a short window during which you can purchase back your property by paying off the outstanding balance on the mortgage plus all costs associated with the foreclosure.
The rules governing redemption periods vary depending on your state’s foreclosure laws.
Eviction
If you don’t pay off the required balance during the redemption period, you must vacate the property once the new owner takes possession of the house. The amount of time you have before moving out will depend on your state’s laws and the new owner.
How to stop foreclosure
Facing foreclosure can take an emotional toll. Fortunately, you have several options to help you stop foreclosure and keep your home.
Ask about a repayment plan
Depending on your mortgage lender, a repayment plan could be an option to help you catch up on missed payments. If available, a repayment plan temporarily increases your payments to cover the past-due amount.
For instance, if you’re behind $3,000, your lender might consider a payment plan that adds $500 to your next six payments to bring you current. While your lender may still consider your loan in default until you make good on the required payments, it’s still a way to help you get back in your lender’s good graces and stop foreclosure.
Apply for forbearance
To save your home and stop foreclosure, you can request a forbearance on your existing mortgage. A forbearance offers temporary relief — usually via a payment pause or reduction — to help you get your finances in better shape. A forbearance period generally lasts six months, though you’ll need to ask your lender for their exact terms. At the end of the forbearance period, you’ll still need to pay the owed amount on the paused or reduced payments.
Refinance your mortgage
You could refinance your mortgage to avoid foreclosure if you have the credit, income, and employment history to qualify. If you’ve missed payments and your credit has taken a hit, you’ll likely pay a higher interest rate. A co-signer with good credit may improve your approval odds. You’ll also need to pay closing costs on the new mortgage.
However, refinancing resets your payment history, pays off your current mortgage, and stops the foreclosure process. Just make sure you’re not trading one mortgage with late payments for another loan you’ll struggle to afford.
Learn more: The best mortgage refinance lenders
Look into loan modification
Loan modification alters the terms of your existing mortgage, typically to make payments more affordable. If your lender offers this option, they can adjust your existing loan in several ways: refinancing for a longer term, rolling past due amounts into your ongoing payments, and changing your loan to an interest-only or adjustable-rate product that reduces your payments for a set term.
Consider a deed in lieu of foreclosure
If finances are tough and you’ve decided to move out of your home, you could stop foreclosure by returning your house to the lender. This process, called a deed in lieu of foreclosure, should free you of responsibility for any remaining mortgage payments in exchange for surrendering your home.
Before agreeing to a deed in lieu, it’s crucial to ensure that the agreement doesn’t leave you on the hook for a portion of your outstanding mortgage. With this process, you’re really looking for an even-steven trade: The lender gets the house, and you walk away.
Apply for a short sale
If you owe more than your home is worth, you could avoid foreclosure through a short sale. With a short sale, you get to list the house for sale for less than the outstanding mortgage — say a sales price of $250,000 when you owe $300,000. When the home sells, your lender agrees to forgive the shortfall.
Why would a lender let you sell your home for less than it’s worth? Well, foreclosures cost your lender money and take time. Through a short sale, your lender saves money, and you avoid foreclosure. However, short sales can have pitfalls as well. Some states allow lenders to sue homeowners for the amount of the shortfall. Even if your lender writes off the loss, you could face taxes on the amount.
If you’re considering a short sale, the U.S. Department of Housing and Urban Development (HUD) has housing counselors to help you navigate the process.
File for bankruptcy
A surefire way to stop foreclosure proceedings — even on the day before the trustee sale — is a bankruptcy filing. If you file for bankruptcy, this places an automatic stay on your foreclosure. While your lender might file to keep the foreclosure going through a legal process called relief, you’ll still get a reprieve — often up to a month or two if the court grants your lender permission to proceed. Nevertheless, this move gives you time to pursue a remedy with your lender.
Dig deeper: Can you file for bankruptcy and keep your house?
Foreclosure FAQs
What is a foreclosure in simple terms?
A foreclosure is a legal proceeding that lets a lender force the sale of a home if the buyer defaults on their mortgage payments. The foreclosure process is a way for a lender to recoup the costs of a piece of real estate when a borrower fails to make payments as agreed.
How long will a house be in foreclosure?
The time a home is in foreclosure depends on the type of foreclosure. Non-judicial foreclosures tend to be quicker and resolved in a few months or less. Judicial foreclosures take longer, from several months to a year or more, depending on the state.
Is it OK to buy a foreclosure?
Yes, it’s OK to buy a foreclosure if you’re fully aware of the risks. Most foreclosed homes go to auction “as is” without the opportunity for an inspection, and you might find the home needs considerable repairs. Buying a foreclosed home can also mean paying more at the closing table since banks and lenders may not cover the seller’s share of closing costs.
This article was edited by Laura Grace Tarpley.
