Foreclosure is every homeowner’s nightmare. Bad things happen to good people. Someday, you may find yourself at risk of losing your home if you cannot meet your mortgage obligations. You could lose your income following a significant life event (death or divorce, for example) or a change in your circumstances, such as losing your job or a major accident.
This article will help you understand the foreclosure process, including a rough timeline and how to avoid foreclosure.
What is a foreclosure?
A foreclosure is a legal process through which a bank takes possession of a property after the homeowners fail to make their payments. Since mortgages use real estate properties as their collateral, the lender tries to sell the property to recover the amount owed on the defaulted loan.
Foreclosures do not happen overnight. It is a long, often expensive process for mortgage lenders. It could be months, even years, between the first missed payment and the sale of the foreclosed property. In fact, according to a recent Attom Data survey, properties foreclosed in the second quarter of 2021 took an average of 922 days from the first public foreclosure notice to complete the foreclosure process. Therefore, it is primarily the last resort for lenders.
For property owners, foreclosures can be even more traumatic. Not only do they lose their homes, but foreclosures stay on the credit report for up to seven years. It is a major red flag for lenders and can prevent them from obtaining a new mortgage, renting a property, or contracting other loans (credit cards or car loans, for example) for many years.
How does foreclosure work?
The exact foreclosure procedure, including the delays involved, varies depending on the state. Some states require the lenders to file a lawsuit to take possession of the property (judicial foreclosure). In contrast, others rely on the power-of-sale clauses in the mortgage or deeds of trust, bypassing the legal procedure (non-judicial foreclosure.) If you live in a non-judicial state, the mortgage originator does not need court approval to proceed and only needs to file the required paperwork. Delays in judicial states are longer since each step must be filed and approved by the court.
However, here is an overview of the different steps of the foreclosure process. Note that, throughout the process, homeowners can stop the process by paying back their debt (including incurring fees) or negotiating with their mortgage originator until the house goes up for auction.
Payment default
Although technically, you are defaulting on your mortgage as soon as you miss a payment, most lenders are more forgiving. Many include a grace period – typically 15 days past the mortgage due date – and will likely attempt to contact the borrowers several times to inquire about the situation.
Although it can be tempting to ignore your lender’s phone calls if you have missed one or several mortgage payments, it is also one of the worst moves you can make if you want to avoid foreclosure. If you miss more than one mortgage payment but think you can still remediate the situation, the lender may be willing to work out a solution, such as a loan modification or a payment plan. Depending on the case, you may be able to return your account to good standing by paying the back-owed amount. Although your credit will likely take a hit, you are not at risk of foreclosure.
However, if you are behind in your mortgage by more than 90 days (or four missed payments) and have not reached an agreement with your lender, the lending institution will likely start the foreclosure process.
Notice of Default
If you have missed four mortgage payments or more, your lender will send you a Notice of Default (NOD) via certified mail, filed at the County Recorder’s Office. It is the first official step in the foreclosure process. Most states prohibit lenders from initiating the procedure until the borrower is more than 120 days past due. Therefore, you have some leeway to find a solution – if you need to find a new job or reach out to your lender, for example – before you are at risk of losing your home.
The NOD is a public notice and typically includes details such as the borrower and lender’s name and address, the legal address of the property, the nature of the default, and so on. Typically, you have from the time the NOD is recorded to pay the most recent bill and stop the foreclosure process. It is known as the reinstatement period.
Notice of Trustee Sale
The lender will pursue the foreclosure process if you fail to reinstate the loan within 90 days. They will record a notice of sale in the county where the property is located, including a time, location, and minimum opening bid for the property for the auction sale. They must also publicly advertise the sale (by publishing a notice in the local newspaper, for example), including the auction details for several consecutive weeks.
The period between the notice of default and the home sale is also known as pre-foreclosure since the borrower is still the legal owner of the property and can stop the foreclosure process. The borrower still has a chance of keeping possession of the property until the day of the auction by paying back the delinquent loan, including any additional fees incurred by the procedure, such as attorney fees. Depending on your situation, some lenders may be willing to work out a special payment or relief plan.
Auction
The lender will first attempt to sell the property at a public auction, typically held by the local sheriff’s department. While the highest bidder may win the property, many properties go unsold since the minimum bid is calculated not only on the assessed value of the property but also the value of the outstanding loan plus any liens, unpaid taxes, and costs associated with the sale. If there are many expenses related to the house or if property values have declined significantly – for example, maybe the market has tanked since the original homeowners purchased the home or if there are a lot of damages – there may not be any interested buyers.
If the sale successfully goes through, the highest bidder receives a trustee’s deed and can take possession of the property. The borrower typically has three days to vacate the property before the new owner starts the eviction process. In the case where the sale of the home yields more money than what the borrowers owe to the mortgage lenders (including the loan balance and foreclosure costs), then any profit goes back to the original homeowners. On the other hand, the lender may file a deficiency judgment against the borrowers if the house sells for less than what they owe unless the state has an anti-deficiency law.
Real Estate Owned (REO)
If the property fails to sell during the public auction, it becomes a real estate owned property (sometimes also known as an REO or bank-owned property). The mortgage lender becomes the property’s owner and can sell it on their terms, using a broker or an REO asset manager. To make it more attractive for potential buyers, they may wave some of the liens and expenses attached to the property.
Notice of Eviction
Once the property changes owners – either after a sale during the public auction or the mortgage lender taking possession of it if it does not sell – you will need to vacate the property if you have not already done so.
If you are still occupying the house, the new property owners will request that you remove any personal belongings and leave. After a reasonable delay – from a few days to a few weeks depending on the location – the local sheriff will come and enforce the judgment, impounding any personal property left behind.
The new property owners may also offer a “cash for keys” deal to convince the occupants to vacate the property rapidly without causing additional damages that would affect the home’s resale value. For banks, this practice can help speed out the eviction process and attract the goodwill of the former owners. Meanwhile, it is an excellent way to help the former owners get back on their feet and hopefully find new living arrangements more easily since their credit score took a significant hit after going through foreclosure.
If you are having trouble making payments, take a look at some of these alternatives to foreclosure before it’s too late to save your home.
