The home foreclosure process is a hot topic in the current economy. Sadly, it’s a sign of the times. An estimated 2 million homeowners will face foreclosure in 2011 – 2012. So the need for quality information has never been greater. In this article, we will discuss the basic process that takes place when a home gets foreclosed on.
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.
In a judicial foreclosure, the bank or lender must go through the courts before they can foreclose on the home. As you would imagine, this makes the entire process take longer. (It also slows down housing recovery by perpetuating a backlog of distressed properties, but that’s another article entirely.)
In the non-judicial foreclosure process, the bank or lender does not have to go through the courts. All they have to do is 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. It would be a beast of a task for me to explain the procedures for every state in this article. Instead, I’ll focus on the steps that are similar across the board. You’ll have to research the unique procedures for your particular state, and it’s important that you do. Your first task is to determine whether you live in a judicial or non-judicial state, from a foreclosure standpoint.
Basic Steps in the Foreclosure Process
As mentioned earlier, the process will vary from state to state. Sometimes it varies slightly from one county to the next, within the same state. But the basic steps are the same. And those are the steps will examine below. This will give you a basic understanding of how the foreclosure process works. After reading this lesson, you can continue your research to learn exactly how it works in your county and state. Start with the basics, and then move on to the specifics.
Step 1 – The Homeowner Misses Payments
The whole process begins when a homeowner falls behind on the mortgage payments. Now, when this happens, a foreclosure is not necessarily inevitable. This is one of the key takeaway points for this article. Some homeowners temporarily fall behind on their mortgage payments, but then they get caught up again.
Banks realize this, so they offer ways for borrowers to get back on track. For instance, they might allow the homeowner to make a single lump-sum payment to account for the missed payments. This is known as reinstatement. They may also take the total amount owed in back payments and spread them out in a payment plan, to lessen the financial burden on the homeowner. This is referred to as forbearance. Most lenders will offer one or both of these strategies, as a way to avoid the foreclosure process entirely.
Here’s the key point to take away from this step: 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 have only suffered a temporary financial setback, explain the situation to them and ask what options you have.
Of course, there are times when the 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. Here’s how it happens…
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. (By the way, “default” is a legal term that means you have failed to meet a financial obligation.) They might send one letter or several. They may 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. This brings us to step #3 in the foreclosure process…
Step 3 – The Homeowner and Lender May Find a Solution
Several times already, I’ve mentioned the distinction between temporary and permanent financial problems. It’s a big distinction, as far as the foreclosure process goes. Homeowners who are suffering a temporary setback might move into step #3. Homeowners with a permanent inability to pay their mortgages will skip step #3 and move into step #4 below.
Here’s the bottom line: If you have the financial capacity to get caught up on your mortgage payments, you should contact your lender and let them know. Ask them about reinstatement (paying off the back payments in a lump sum), repayment and forbearance (spreading the missed payments over future installments).
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 aforementioned solutions will work. This is where the distinction between judicial and non-judicial states becomes important.
- In a judicial state (such as Delaware, Illinois and New Mexico), the courts are more heavily involved in the process.
- In a non-judicial state (such as 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.
We’re starting to wander into the legal weeds here, and I want to avoid that.There are too many procedural differences at the state level for me to explain them all here. So when you continue to research the foreclosure process in your state, start with the distinction between judicial and non-judicial.
A rising trend among homeowners is to ask the lender to produce the original note for the mortgage. In many cases this will delay the foreclosure process, especially if the loan has been securitized and resold through the secondary mortgage market (which is common these days). This technique may help buy some time, but there’s no point in doing it unless you can get caught up on your payments.
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. “Foreclosure” is a legal term that means taking possession of a mortgaged property. A foreclosure sale / auction is typically the next thing that happens during the process. The lender wants to get the home off their hands as quickly as possible, so they’ll usually price it to sell quickly. This might mean that the home is priced below its current market value.
Incidentally, this is why so many investors buy foreclosure properties in the first place. It’s an opportunity to purchase a home for less than market value.
Conclusion and Summary
While the steps may vary from one state to another, this is generally what happens during a home foreclosure process. Here’s what you should take away from this lesson. If you are falling behind on your mortgage payments, the worst thing you can do is nothing. You should take action as soon as possible to avoid being foreclosed on, if at all possible.
If your financial problems are temporary, and you want to get back on track with your payments, ask your lender about repayment or forbearance. See if you’re eligible for a home loan modification to make the payments more affordable. If you just can’t afford the home anymore, investigate your selling options through the short sale process.
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