Foreclosure is a word that no one wants to hear, but if your mortgage lender is about to foreclose on your home, you need to take immediate action. Ignoring the problem will make things worse. You have options for dealing with foreclosure — including some that let you keep your home.
Here’s how the foreclosure process works, and how you can respond if your lender is about to foreclose on your home.
- Foreclosure occurs when you miss mortgage payments or otherwise break the terms of your loan.
- Your lender will notify you that you are in default and can then begin foreclosure proceedings.
- At the end of the foreclosure process, your home is sold and the new owner will evict you.
- There are many options for homeowners looking to avoid foreclosure or mitigate the negative financial effects of foreclosure.
Foreclosure Explained: What Is Foreclosure?
When a homeowner falls behind on repaying their home loan, the mortgage lender will begin a legal process called foreclosure, which forces a sale of the property. The proceeds are paid to the lender to recoup the money it lent to the borrower to buy the home with. The homeowner must vacate the home or be evicted, and the foreclosure will appear on their credit history and have a major negative impact on their ability to qualify for new credit or loans — including another mortgage.
“It’s a situation no homeowner wants to face, but sometimes financial difficulties can lead to this unfortunate outcome,” says Christian Norman, CEO and founder of Christian Buys Houses in Woodstock, Georgia.
While nonpayment is the most common reason why lenders foreclose on a home, they also may foreclose if the borrower violates the terms of the loan in other ways. For example, failing to buy the required homeowners insurance, neglecting to pay property taxes, or having past-due homeowners association fees all could trigger foreclosure.
The precise timeline and process for foreclosure are decided by state law, so the details will vary depending on the location of the home being foreclosed on.
Types of Foreclosure
There are two main types of foreclosure. Which one your lender may use generally depends on the state you live in. Some states use both types, depending on the situation.
A judicial foreclosure involves going to court. When your lender wants to foreclose, it must bring you to court and give you the opportunity to present a defense.
States using judicial foreclosure include:
- New Jersey.
- New Mexico.
- New York.
- North Dakota.
- South Carolina.
With nonjudicial foreclosures, courts don’t get involved in the process. Instead, the lender follows a series of steps outlined by state law. Typically, these steps include giving written notices and providing specific waiting periods.
States using nonjudicial foreclosure include:
- New Hampshire.
- North Carolina.
- Rhode Island.
- South Dakota.
- West Virginia.
How Foreclosure Works
The precise process for foreclosure depends on whether the lender is pursuing a judicial or nonjudicial foreclosure. It also can vary slightly from one state to another. However, most foreclosures follow this rough blueprint.
1. Loan enters default
The trigger that starts the foreclosure process is the borrower defaulting on their loan. Usually, the borrower must miss three monthly payments before the lender will initiate foreclosure. If you stay current on your payments and follow the terms of your loan, you will not enter foreclosure.
2. Notice of default
Though the foreclosure process differs by state, the lender often begins the process by notifying the borrower in writing that they are in default, and then filing a notice of default with the local recorder’s office. Both documents are sometimes referred to as a notice of default, depending on state law.
At this point, the borrower usually still can avoid foreclosure if they find a way to make all the missed payments, plus pay any late fees or other charges.
Depending on where you live, you may have to go through mediation with your lender. This gives you the opportunity to work with the lender to avoid foreclosure, such as coming up with a payment plan or settling the debt some other way.
4. Foreclosure filing or notice of intent to foreclose
If mediation isn’t required or fails to resolve the situation, the lender will file for foreclosure with the courts if it’s pursuing a judicial foreclosure, or submit a notice of intent to foreclose if it’s pursuing a nonjudicial foreclosure.
This serves as your final warning regarding the foreclosure, and gives the dates when the lender will begin advertising the sale of the home.
If the lender pursues a judicial foreclosure, the trial will occur before the lender can advertise the sale of the home.
The lender will be required to prove in court that it has the right to foreclose on the property, and will provide loan documents — such as the deed of trust and promissory note — as evidence.
You may answer the lawsuit and mount a defense if you think you can prove that the lender should not be able to foreclose. Depending on the evidence, the judge may issue a summary judgment in favor of the lender, or allow the case to proceed through discovery, jury selection, and trial. This process would generally require you to have legal representation, take up significant time, and likely be very expensive, so you would need a good legal defense to justify going to trial.
6. Advertisement of sale
Your lender will publish a required legal notice in a local newspaper to inform the public of the default and to set the sale date for the property. The requirements for advertising the sale vary by state, but typically involve running the notice for a few weeks.
How sales work varies by jurisdiction, but they typically take the form of an auction conducted by the county sheriff’s office. Minimum bids, home appraisal requirements, deposits, and payment timelines will depend on local law.
The proceeds from the sale are first used to cover the cost of the sale and any outstanding taxes. The primary lienholder is paid next, and then any junior lienholders, if the homeowner has a second mortgage such as a home equity loan or home equity line of credit. If any money is left over after that, it goes to the borrower.
If you don’t voluntarily leave your home after the foreclosure sale, then the new owner of the home will begin eviction proceedings in accordance with state law.
If the home is occupied by renters, then the process may differ. For example, if the renters had a lease prior to the notice of foreclosure, they often can stay in the home for the remainder of that lease.
How Long Does Foreclosure Take?
How long a foreclosure takes varies significantly and depends on your jurisdiction. For example, in 2022, Hawaii had the longest average foreclosure time at 2,578 days. Montana had the shortest average foreclosure time at 133 days.
Consequences of Foreclosure
The most obvious consequence of foreclosure is that you lose your home. However, there are other negative effects to be aware of:
- Damaged credit score. Missed or late loan payments show up on your credit report, which will damage your credit score.
- Foreclosure on your credit history. A record of the foreclosure also will appear on your credit history and remain there for seven years. It will appear even if you eventually make good on the payments. Just reaching the start of the process will cause it to show up.
Having a lower credit score means it will be more difficult to get loans, and the loans that you do qualify for will tend to have higher interest rates. Lenders also will be able to see the foreclosure when they check your credit report. Some lenders may refuse to lend to anyone with a recent foreclosure on record.
How To Avoid Foreclosure
If you’re struggling to pay the mortgage, don’t let it reach the point where you’re dealing with foreclosure proceedings.
“Lenders are usually eager to make a deal to avoid foreclosure. It’s very common for a home sale to happen during the preforeclosure process, since this will allow the borrower to keep the foreclosure off of their financial record and also allow banks to keep the mortgage technically intact,” says Ben Michael, an attorney at M&A Criminal Defense Attorneys in Austin, Texas. “Even before preforeclosure, most lenders will happily let borrowers get back on track by making up missed payments.”
Ask for forbearance
If your financial issues are temporary, you can ask your lender for a forbearance period. During forbearance, interest accrues on your loan like normal, but you aren’t required to make any payments.
For example, your lender may give you three months of forbearance. That means you can skip three payments and work to get back on your feet financially. After those three months, you’ll resume payments.
Keep in mind that forbearance may extend the remaining term of your loan or cause your payments to increase due to the accrued interest.
Sell your home
If you can sell your home before going into foreclosure, you can use the proceeds to pay off your current mortgage and keep any cash that’s left over. However, that can take time you may not have if you’re defaulting on your loan. It took an average of 54 days to sell a house in March 2023.
Refinance your mortgage
Refinancing a mortgage lets you replace your existing loan with a new one. You generally can’t refinance your mortgage once you’re in foreclosure, but if you foresee trouble, refinancing can help reduce your monthly payment to be more affordable.
Three common ways to reduce your monthly mortgage payment through refinancing are:
- Eliminate private mortgage insurance. Refinancing when you have sufficient home equity can help you cut PMI from your loan, lowering your monthly payment.
- Reduce the interest rate. Loans with lower interest rates will have lower monthly payments because less interest will accrue each month.
- Extend the loan term. If you stretch repayment over a longer period, you can reduce the amount that you have to pay each month.
If you have strong credit, refinancing to a lower monthly payment could help you avoid missed payments and foreclosure.
Get approved for a repayment plan
If you’ve started falling behind on payments, reach out to your lender to work out a repayment plan. Under these plans, you can take several months to get back up to date on your mortgage, typically through making additional payments on top of your required monthly payment.
Ask for a mortgage reinstatement
If you default on your mortgage, you can ask your lender for a mortgage reinstatement rather than moving forward with foreclosure. To get your loan reinstated, you need to come up with the money to cover all of your missed payments, plus late fees.
If you ask for mortgage reinstatement, the lender will send you a mortgage reinstatement letter providing a due date as well as the amount you have to pay to get the loan reinstated.
Consider mortage loan modification
You also can ask your lender to modify your current loan, which could result in similar savings to refinancing without paying the costs of refinancing. This can mean extending the term of the loan, reducing the interest rate, or forbearing a portion of the loan’s payments for a time.
Apply for a short sale
You can ask your lender to allow you to sell your home through a short sale. Short sales serve as an alternative to foreclosure but still will result in you having to leave your home. If your lender agrees, then you can begin the process.
Keep in mind that your lender will only agree if you truly can’t afford the payments. If you have savings or can cut spending elsewhere to make your mortgage payment, then the lender is unlikely to allow a short sale. Be ready to prove that you’re facing significant financial hardship.
The benefit of a short sale is that it has a smaller impact on your credit than a foreclosure. It’s still a negative mark, but it won’t damage your credit quite as much.
However, short sales can take a while and involve a lot of paperwork. Buyers likely will do much more due diligence and will look closely to make sure they understand all the liens on the property. You also lose negotiating power, as your lender will be the one working with buyers to determine the sale price.
If a buyer purchases your home, you won’t see any of the proceeds from the sale. However, if the home sells for less than your remaining mortgage balance, the lender will forgive the remaining balance of the loan, leaving you debt-free.
Sign a deed-in-lieu of foreclosure
If you know that you have no chance of making good on your missed payments and your lender isn’t willing to work with you on a repayment plan, forbearance, or a refinance, you could consider a deed-in-lieu of foreclosure.
This involves signing over the deed to your home to the lender in exchange for eliminating your debt. You’ll lose your home but avoid having a foreclosure on your credit report and dealing with the legal system.
Where To Find Help
Dealing with potential foreclosure can be stressful. You don’t have to do it alone.
One of the first things to do is to find a housing counselor. The Consumer Financial Protection Bureau offers a list of government-approved counselors that you can work with.
Many state governments and local organizations also offer assistance to those facing potential foreclosure.
How to avoid scams
The unfortunate truth is that malicious actors often try to take advantage of people facing foreclosure. During such desperate times, it’s easy to fall for a scammer who promises to help you keep your home.
It’s important to not fall for anything that sounds too good to be true. Only work with reputable groups, such as government-approved counselors, local government entities, or nonprofit organizations with a long track record.
Common signs of a scam include:
- Charging upfront fees.
- Telling you to stop making payments.
- Telling you to make payments to someone other than your lender.
- Pressuring you to act quickly.
- Asking you to sign over the title to your home.
FAQ: Foreclosures in Real Estate
If you’re facing foreclosure, it’s important to make sure you understand the process and how you can avoid it. Here are some frequently asked questions.
Most lenders start the foreclosure process between three and six months after the first missed loan payment.
Yes, you can sell your home instead of allowing the lender to foreclose. If you have sufficient equity, selling could let you get some cash out of your home rather than losing out entirely. If you don’t have much equity, a short sale may be an alternative.
Yes, you can file legal paperwork to contest the foreclosure. Lenders must follow various rules and regulations throughout the foreclosure process, such as making a good faith effort to contact people who are delinquent on their loans to discuss loss mitigation options. If you can provide evidence that the lender should not be able to foreclose — such as if they didn’t follow the legally required process — you may be able to delay or avoid foreclosure. Work with an attorney to learn about your options.
The Bottom Line on Foreclosures in Real Estate
If you’re at risk of falling behind on your mortgage payments, it’s important to be proactive to avoid foreclosure. If you take the right steps, you can work with your lender to avoid losing your home. If it’s too late and foreclosure proceedings have begun, work with a housing counselor and your lender to find out if there are ways to avoid foreclosure or what path you can take to limit your losses.
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