During the first quarter of this year, more than 95,000 homes in the United States had a foreclosure filing. Most of them will end up being foreclosed on, with the bank or government taking ownership of the property.
The point being: home foreclosures are a regular occurrence in America. At any given moment, thousands of American homeowners are losing their homes to foreclosure.
Summary: This guide explains how the foreclosure process works, steps that are involved, and specific actions homeowners can take to avoid being foreclosed upon if they’re behind on payments.
Judicial vs. Non-Judicial Foreclosures
The foreclosure process varies from one state to the next. The main difference has to do with the legal documents used when transferring real estate.
Some states use mortgages for this purpose, while others use deeds of trust.
Generally speaking, states that use mortgages have a judicial foreclosure process, and the states that use deeds have a non-judicial process.
Judicial Foreclosure: Courts Are Involved
In a judicial foreclosure, the bank or lender must go through the courts before they can foreclose on the home. The judicial process provides more legal protections for homeowners, but it can be slower and more costly as well.
Non-Judicial Foreclosure: No Courts
In the non-judicial foreclosure process, the bank or lender does not have to go through the courts. That’s because the deed usually contains a “power of sale” clause. This clause allows the lender to foreclose on the property and sell it to satisfy the debt.
With a non-judicial foreclosure, the lender simply has to send a letter of default to the homeowners. In most cases, they have to file a Notice of Default with the county as well. But the courts don’t actually have to review the case. So the process moves more quickly than it does in the judicial states — generally speaking.
Which foreclosure process do you have in your state? You’ll have to look it up. You can also refer to this state-by-state breakdown on the NOLO.com legal website.
Basic Steps in the Foreclosure Process
As mentioned earlier, the process will vary from state to state. It can also vary slightly from one county to the next, within the same state.
But the basic steps are generally the same, and they look something like this:
Step 1: The Homeowner Misses Payments
The whole process begins when a homeowner falls behind on the mortgage payments.
Important: When a homeowner gets behind on their payments, foreclosure is not inevitable. Some homeowners temporarily fall behind but eventually get caught up again.
Most lenders will offer ways to get get back on track, such as:
- Reinstatement allows a borrower to stop the foreclosure process by paying the total amount they owe, including missed payments, late fees, and legal costs, to bring the loan current.
- Forbearance temporarily reduces or suspends mortgage payments, giving the borrower time to improve their financial situation and avoid foreclosure, with the understanding that the missed payments will be repaid later.
Many lenders will offer one or both of these strategies, as a way to avoid the foreclosure process entirely.
So, just because you’ve missed a single payment (or even a handful) doesn’t mean you’re bound for the foreclosure process. There are ways to right the ship.
If you are early on in the process, and you haven’t spoken to your lender or loan servicer yet, now is the time to do it. If you’ve only suffered a temporary financial setback, explain the situation to them and ask what options you have for getting back on track.
On the other hand, there are times when a homeowner’s financial problems are more permanent in nature. In these cases, the foreclosure process will move forward and they will eventually lose the home, starting with step #2 below.
Step 2: The Lender Sends Notices
When you fall behind on your mortgage payments, you’ll eventually receive a letter from your lender. This is your initial notice of default.
Definition: A “default” occurs when a borrower fails to meet the terms of their mortgage agreement, typically by missing payments, which can trigger the foreclosure process.
The lender might send one letter or several. They might even call you to give the notice. But there will be at least one letter, at a minimum.
This letter marks the first official step in the foreclosure process. It might be sent anywhere from 30 – 60 days after a payment deadline has lapsed. It varies from one lender to the next.
Keep in mind that most lenders want to avoid the foreclosure process, if possible. They are in the business of lending money, not managing and selling real estate. In most cases, they can make more money (and avoid a lot of hassle) by keeping the homeowner in the home.
Are your financial problems only temporary? If so, you could still save your home.
The lender’s notice of default is not the final nail in the coffin. Contact their “loss mitigation” department and explain your situation. Tell them you are willing to bring the loan current again.
And this brings us to step #3 in the foreclosure process…
Step 3: Homeowner and Lender Might Find a Solution
Several times, we’ve mentioned the distinction between temporary and permanent financial problems. This is an important distinction, as far as the foreclosure process goes.
- Homeowners who are suffering a temporary setback might move into step #3, which involves finding a solution.
- Homeowners with a permanent inability to pay their mortgages often skip step #3 and move into step #4 below, which involves an actual foreclosure.
If you have the financial capacity to get caught up on your mortgage payments, you should contact your lender and let them know. Do this ASAP.
Ask them about reinstatement (paying off the back payments in a lump sum), repayment, and forbearance options (spreading the missed payments over future installments). Tell them you want to find a solution for getting back on track.
Step 4: The Lender Starts the Foreclosure Filing
If the homeowner continues to default on the loan, the lender will file the necessary paperwork to foreclose on the home. This is typically the next thing that happens during a foreclosure process, if none of the above solutions will work.
The judicial versus non-judicial states distinction comes into play here:
- In judicial states (such as Delaware, Illinois, and New Mexico), the courts are more heavily involved in foreclosures, reviewing the case and overseeing the process.
- In non-judicial states (such as Arizona, Michigan, and Tennessee), the bank can move forward without court approval. The deed of trust will have a “power of sale” clause that allows the trustee to sell the property without having to go to court.
From here on out, the foreclosure process can unfold differently depending on what state you are in. So you’ll want to continue your research using state-specific resources. See the list below.
Step 5: The Lender Will Foreclose and Sell the Home
If the homeowner continues to default on the loan, the lender will foreclose on the house.
Definition: Foreclosure is a legal process initiated by a lender to take possession of a property when a borrower fails to make mortgage payments according to the terms of the loan agreement.
A foreclosure sale or auction is typically the next thing that happens. The lender wants to get the home off their hands as quickly as possible, to avoid long-term maintenance hassles. So they’ll usually price it to sell quickly. This might mean that the home is priced below its current market value.
On a side note, this is why so many investors buy foreclosure properties in the first place. It offers an opportunity to purchase a home for less than market value.
Conclusion and Summary
If you are falling behind on your mortgage payments, the worst thing you can do is nothing. Take action as soon as possible to avoid being foreclosed on, if possible.
Here are some of the basic options a homeowner has to avoid foreclosure:
- Reinstatement: The homeowner pays the full amount of missed payments, plus any fees, to bring the mortgage current and stop the foreclosure process.
- Forbearance: The lender temporarily reduces or suspends mortgage payments, giving the homeowner time to improve their financial situation.
- Loan modification: The lender may agree to change the terms of the mortgage (e.g., lowering the interest rate or extending the loan term) to make payments more affordable.
- Repayment plan: The lender works with the homeowner to create a plan to catch up on missed payments over time, often adding extra amounts to future monthly payments.
- Refinancing: The homeowner obtains a new loan to pay off the existing mortgage, potentially at a lower interest rate, to reset their payment schedule.
- Short sale: The homeowner sells the property for less than the mortgage balance, with the lender’s approval, to avoid foreclosure.
- Deed in lieu of foreclosure: The homeowner voluntarily transfers ownership of the property to the lender to avoid the foreclosure process.
These options depend on the lender’s policies and the homeowner’s financial situation.
Disclaimer: This article is for informational purposes only and should not be considered legal advice. Foreclosure laws and processes vary by state, and individual circumstances can significantly impact available options. Homeowners facing foreclosure are encouraged to consult with a qualified attorney, housing counselor, or financial professional to explore the best course of action for their specific situation.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author