Foreclosure is a situation that no homeowner wants to be in, but the circumstances of life can sometimes take a turn for the worse and leave you facing a mortgage that is delinquent or in default.
Being behind on your mortgage payments can seem all the more frightening when you don’t understand the foreclosure process, so learning more about the technical terms and the stages of foreclosure can help ease your mind by giving you a better idea of what to expect. Additionally, you may be able to take advantage of available resources that could help you avoid losing your home or mitigate some of the challenges you may encounter along the way.
What Does Foreclosure Mean?
Foreclosure is the process of a lender taking possession of a property as collateral against an unpaid mortgage balance.
When a homeowner fails to pay the full monthly amount of principal and interest due, the lender considers the loan to be delinquent. While most mortgage agreements state that even one late or partial payment puts the loan into default, most lenders don’t pursue a repossession action until your mortgage is in arrears for two to three months.
If you aren’t able to resume making full payments, make up the difference of the delinquent payments and also pay any late fees or penalties within about three months, the lender will initiate a foreclosure action.
The Foreclosure Process
From your first delinquent payment to vacating the premises, the typical foreclosure process takes at least six months to a year.
Different states have various laws that dictate how long the average foreclosure takes. If you live in a jurisdiction that uses the power of sale, or non-judicial, method, the bank could sell your property at auction in as little as two to three months after the loan formally defaults. Other jurisdictions use the judicial foreclosure method, meaning that a court oversees the repossession process. A judicial foreclosure is a slower process, and it usually takes several months before the bank can list the property for auction.
While the length of your foreclosure process depends on your state’s laws, all foreclosures happen in three stages.
Once you’ve been delinquent with your mortgage payments for three months, your lender will consider your debt to be in default and will send you a letter informing you that foreclosure proceedings will begin. The bank also issues a public Notice of Default, a legal statement that your loan is in arrears but has not yet gone up for auction.
Once you receive a Notice of Default, you have 90 days to bring your mortgage into good standing by paying the delinquent balance along with any fees or penalties from the bank.
However, this stage is where your state’s particular laws greatly impact the length of foreclosure proceedings. In power of sale states, your lender may be able to complete their requirements and place your property up for auction in as little as two or three months after starting the foreclosure process. In jurisdictions that use the judicial method, it may be well over six months before the bank can formally take possession of your home.
Once your lender meets all the necessary obligations during the pre-foreclosure stage, they will send you a Notice of Sale or Notice of Trustee. At this point, the bank sets a date for a public auction where they will sell your home to the highest bidder. You can usually expect to see a sale date that is approximately 21 days after the bank sends the Notice of Sale.
Once your lender completes the sale of your home to the highest auction bidder, the foreclosure process is complete. You no longer have any options for regaining possession of your former home.
Unfortunately, a home foreclosure has the potential to have a serious negative impact on your life and your credit score, so taking any possible measures to prevent a formal bank repossession is in your best interests.
- Read all your mail. Even though it may seem less stressful to leave correspondence from your lender unopened, ignoring letters or notices only compounds the problem. Failing to read your letters or respond promptly can lead to negative situations like growing late fees, penalties and missed opportunities to reach an agreement with your lender.
If you have concerns about falling behind on your mortgage payments, make sure to check your mail frequently. Additionally, set aside a safe place to organize your correspondence for future reference.
- Attempt to refinance. If your lender allows it, you may be able to take out a new loan to pay off your delinquent mortgage balance. However, many lenders are wary to offer a refinancing option for mortgages that are already in arrears, so contact your lender to discuss refinancing as soon as you realize you may have difficulty making your full mortgage payments.
- Seek assistance. The federal government offers assistance to homeowners facing difficulties in making their mortgage payments or dealing with a foreclosure. Contact the Making Home Affordable Program at 888-995-HOPE (888-995-4673) for help in staying in your current home or finding a new one.
- Pay the delinquent balance. In the pre-foreclosure stage, paying the full amount of your delinquent balance and any associated fees will bring your mortgage back into good standing with your lender. If this is an option you want to consider, keep in mind that late fees will continue to accumulate each month, so it will become more expensive over time to pay off the full amount.
- Pursue a short sale. In a short sale, you sell your property to an interested buyer at less than market value and use the money from the sale to pay off all or part of your mortgage balance. Since your lender will likely be accepting a lower payment amount than the outstanding mortgage balance, they will need to agree to the terms of your arrangement with the buyer before the transaction can take place.
While a short sale does not carry the full negative effects of a foreclosure, it can still impact your credit score and affect your ability to take out a new mortgage for a few years.
- File for bankruptcy. While this is an extreme step that can seriously impact your long-term credit, filing for bankruptcy will stop the foreclosure process immediately at any stage prior to the bank legally selling your property.
Different types of bankruptcy can either stop the foreclosure permanently or temporarily, and you may still be able to negotiate a loan modification with your lender during the bankruptcy process.
While falling behind on your mortgage payments or receiving a notice from the bank can be scary, having a better understanding of what the foreclosure process entails and your rights can be empowering. By staying informed on your loan’s status, communicating with your lender and being aware of your possible options, you can retain some control over your situation and develop a plan for the future.