Understanding Foreclosure

Foreclosure happens when a homeowner fails to make payments on their mortgage. It can be a long and complex process that spans months or even years. Here’s what you need to know.

What is foreclosure?

Foreclosure is a legal process by which a homeowner forfeits their rights to their property, based on their inability to make monthly mortgage payments (typically when a borrower is more than 120 days delinquent). When a homeowner stops making their agreed-upon monthly mortgage payments, the foreclosure process allows lenders to recover the amount they’re owed by taking ownership of, and selling the mortgaged property.

The actual act of a lender seizing the property during foreclosure only happens after the lender has performed loss mitigation efforts with the borrower, such as analyzing short term repayment plans, loan modifications, forbearance, short sale or refinance alternatives to foreclosure.

Unlike credit card debt, which is an unsecured loan, a mortgage is a real estate secured loan that uses your home as the collateral. That’s what allows your lender to start foreclosure proceedings if you miss multiple payments.

How long does a foreclosure take?

According to 2021 industry data, the foreclosure process takes an average of 922 days, from start to finish. This foreclosure process begins when a borrower fails to make timely mortgage payments (typically between 3-6 months) and is notified of the default in writing. This is also referred to as pre-foreclosure. Then, the official foreclosure proceedings can occur months later, generally there must be at least four consecutive payments missed.

During the process of foreclosure, if a borrower successfully pays off the deficiency before auction, the foreclosure ends and the eviction and sale are canceled. If the homeowner doesn’t pay off the default balance or make other arrangements in time, the lender will attempt to sell the foreclosed house at auction. If the lender does not sell the house at auction, it becomes a bank-owned property or a real estate owned property, commonly called REO.

What to do if you cannot pay your mortgage

Contact your lender as soon as you have concerns about missing a payment, even before you’ve missed a payment. Foreclosures are costly to lenders, so they would prefer to work with you to find a solution instead.

What should you do if you receive a notice of default?

If you receive a written notice of default in the mail, contact your loan servicer and lender right away.

How does the foreclosure process work?

There are several steps that a lender has to take before they can foreclose a home, including publicly posting a notice, providing you with options to avoid foreclosure and your timeline to foreclose. Every state has different foreclosure laws and depending on the state you live in, your lender may follow a judicial, nonjudicial or strict foreclosure process. Be sure to ask your lender for details specific to your state and situation.

Generally speaking, here are the key milestones in a foreclosure proceeding.

30 days late on mortgage

Homeowner action: You’ve failed to make your mortgage payment for one month and now you’re 30 days late on your mortgage.
Lender response: Your lender will mail you a missed payment notice.
What this means: This is the first step in pre-foreclosure. Within a month or two, your missed payment will show up on your credit report.
What to do: Reach out to your loan servicer and lender as soon as possible to discuss your hardship and options to avoid foreclosure.

60 days late on mortgage

Homeowner action: You’ve failed to make two months’ worth of mortgage payments and now you’re 60 days late on your mortgage.
Lender response: Your lender will send you a demand letter. It may include a “must pay by” date.
What this means: If you don’t pay off your balance or make alternate arrangements by the date in your demand letter, your lender may officially initiate foreclosure proceedings.
What to do: It’s not too late to work out a resolution with your lender. In fact, working out a settlement with you is likely to be less expensive and time consuming for the lender than putting you through a foreclosure.

90 days late on mortgage

Homeowner action: You’ve failed to make three months’ worth of mortgage payments and now you’re 90 days late on your mortgage.
Lender response: Your lender will record a public notice with the county recorder’s office indicating that you’ve defaulted on your mortgage. In some states, this is called a Notice of Default (NOD). In other states, it’s called a “lis pendens” — Latin for “suit pending.” It may be required to be posted on the front door of the home.
What this means: At this phase, you still have 30 days to settle your delinquent balance before the home will be foreclosed.
What to do: You can still apply for loss mitigation and seek options to avoid losing your home. Reach out to your lender and loan servicer immediately.

120 days late on mortgage

Homeowner action: You’ve failed to make four months’ worth of mortgage payments and now you’re 120 days late on your mortgage and officially delinquent.
Lender response: Your lender will issue a notice of trustee’s sale and can now repossess the property. They will schedule a property sale, including a date and time and a minimum opening bid price. The auction can take place in a wide range of locations: at the county courthouse, in the trustee’s office or on-site at the property. The highest bidder is awarded the property and is entitled to immediate possession. If the property doesn’t sell at auction, the lender will try to sell it with the help of a broker or REO asset manager.
What this means: At this point, you’ve run out of options to correct your defaulted payments and you’ll be evicted.
What to do: Once the home has sold, you’ll be issued an eviction notice and be required to vacate the home within a set time period, typically three to 30 days. You may be sued if you ignore the notice.

How to avoid foreclosure

Foreclosure is a worst-case scenario. Luckily, you have many potential avenues to pursue to help avoid foreclosure. In fact, in many states, you have the right of redemption up to the moment the home will be auctioned off. That means if you can come up with the outstanding cash, you can stop the foreclosure process.

The key to avoiding foreclosure is taking early action. Here are the most common avenues to try:

Forbearance

Forbearance lets you pause your mortgage payments when you’re experiencing financial hardships, like if you lose your job or are saddled with large amounts of medical debt. If your lender allows you to do this, they’ll agree to reduce or pause your monthly payments for a set period of time until you can save up enough money to restart your regular payments.

Refinance

Refinancing your loan into a more affordable payment can help you avoid defaulting on your loan. To prevent foreclosure, you must refinance before you miss a payment.

In some instances, your lender may let you do a short refinance. In a short refinance, your lender may allow you to take out a new loan that’s less than your outstanding balance and forgive the difference in order to help you stay in your home.

Short sale

In a short sale, your lender allows you to sell the home for less than the amount you owe on the mortgage. This option requires lender permission.

Repayment plan

Your lender or loan servicer may be willing to create a repayment plan for you, where you pay a specified amount of extra principal each month until you’ve made up your missed payment balance.

Mortgage reinstatement

If your temporary financial hardship has passed, your lender may allow you to make a lump-sum payment for all the payments you missed. You’ll be responsible for any interest, fees and penalties, but this approach does put you back in good standing.

Deed in lieu of foreclosure

If you feel foreclosure can’t be avoided, you can voluntarily turn over the deed to your home and avoid the long, drawn-out foreclosure process.

Foreclosure moratorium

During times of widespread economic uncertainty, the government sometimes implements what’s called a foreclosure moratorium. The most recent time this happened was in 2020-2021, during the COVID-19 pandemic. At the time, no foreclosures were allowed and homeowners could request forbearance. Note that the COVID-19 foreclosure moratorium ended on December 31, 2021.

Consequences of foreclosure

A foreclosure can have serious consequences for your financial well-being. First, within a month or two of missing a payment, the default will show up on your credit report. If the foreclosure goes through, it will be noted on your credit report for seven years from the date of your original missed payment.

Having a mortgage default or foreclosure on your credit report can make it incredibly difficult to rent a home, especially if you ignore the eviction notice and are sued in an eviction lawsuit.

Additionally, if you try to buy another home within the nine-year period, you’ll find it harder to qualify for a mortgage and you’ll likely be saddled with much higher interest rates.

Types of foreclosure

There are three main types of foreclosure you should know about.

Judicial foreclosure

In a judicial foreclosure, the lender must go through the court system to process a foreclosure. Judicial foreclosures can take place in all 50 states, and are required to be used in foreclosure proceedings in the following states: Arkansas, Connecticut, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, South Carolina, Vermont, Virginia and Wisconsin.

Under this type of foreclosure, the lender must file a lawsuit, which you have time to respond to and pay. Only after that can your home be foreclosed upon. Because of the court’s involvement, judicial foreclosures tend to take much more time than nonjudicial foreclosures.

Even though a judicial foreclosure is a type of court proceeding, you won’t have an attorney assigned to you. The US Department of Justice maintains a list of free or low-cost legal resources that may be helpful.

Nonjudicial foreclosure, also called power of sale

Also called power of sale, a nonjudicial foreclosure doesn’t go through the court system. These foreclosures occur when your mortgage has a power of sale clause that allows the lender to auction off the home after a set waiting period and after providing ample notification to the homeowner. States where nonjudicial foreclosures are permitted are: Alabama, Alaska, Arizona, California, Colorado, Georgia, Hawaii, Idaho, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia and Wyoming.

Strict foreclosure

Strict foreclosures are less common because they’re only allowed in two states: Connecticut and Vermont. In a strict foreclosure, the lender files a lawsuit against the borrower, who has a court-ordered amount of time to make up their payments. If payments aren’t caught up by the pre-set date, the home can be foreclosed upon.

Beware of foreclosure scams

Going through a foreclosure is stressful, and scammers often try to take advantage of homeowners who are going through this trying experience. Foreclosure scams are unfortunately common. Before agreeing to anything or paying any money to someone who reaches out to you, call your loan servicer directly to confirm. Learn more about how to spot foreclosure scams.