A foreclosure is the process by which a lender takes possession of a borrower’s property after it becomes clear that the borrower will no longer be able to pay their debt. It’s often referred to as losing your home to foreclosure.
Written by Attorney Curtis Lee.
Updated November 25, 2021
Facing a foreclosure can be very challenging. Not only are you at risk of losing your home, but you’ll also have to figure out how to recover from a damaged credit score. But if you’re facing foreclosure, losing your house isn’t necessarily a done deal. Depending on your finances, the terms of your mortgage loan, and applicable state law, you have options. You may be able to save your home, or at the very least, minimize the negative financial impact of the foreclosure.
The Foreclosure Process
Foreclosure begins when a borrower defaults on their mortgage. With a mortgage loan, the home or real estate backs up the loan as collateral. That means the lender can repossess the property and sell it through foreclosure if the loan isn’t paid as promised. The proceeds are then used to pay off the mortgage balance.
In most foreclosures, default occurs when a homeowner misses multiple monthly mortgage payments. But a mortgage default can occur in other ways as well. This depends on how the mortgage lender chooses to define “default” in the mortgage contract. Other types of mortgage default may include:
Failing to pay property taxes
Not paying for homeowner’s insurance
Engaging in illegal behavior on the property
Causing extreme damage to the property that drastically decreases its value
Transferring the title of the property to someone else without first getting the lender’s permission
After the default, the mortgage company may require the borrower to pay the entire outstanding loan balance. The lender’s right to demand the remaining balance comes from an acceleration clause in the mortgage agreement.
Foreclosure proceedings can be complicated, so it’s not surprising if you get confused or don’t fully understand what’s going on or what happens next. If you want to get a better understanding of your foreclosure, don’t hesitate to get professional advice.
Curing a Mortgage Default
When you’re in default, your lender will let you know. They’ll also give you a limited time to cure the default. Curing the default simply means catching up on your missed payments. You may also need to pay for any additional interest, fees, and costs that have accrued. If you can do this, you can get your mortgage loan reinstated. The amount of time you’ll have to cure the default depends on state law and your mortgage contract. Many borrowers will have 30 to 90 days to fix the default.
Mortgage Forbearance and Loan Modification
Despite how your lender might come across, they probably want to avoid the foreclosure almost as much as you do. Foreclosure is a time-consuming and expensive process. On top of that, the lender loses out on monthly mortgage payments. So most lenders would rather work with you to find a way to avoid foreclosure. This is why the pre-foreclosure process includes loss mitigation.
Loan modification is one loss mitigation option. This is where you and your lender agree to change one or more of your mortgage’s terms to make your monthly payments more affordable. Potential changes may include:
Turning the adjustable interest rate into a fixed interest rate.
Lowering the interest rate if you have a fixed interest rate already.
Extending the mortgage loan’s term.
While not generally a part of loss mitigation, another way to help avoid foreclosure is with mortgage forbearance. This is an agreement between you and your bank where the bank agrees to reduce or suspend your mortgage payments for a set period, often three to six months. When the forbearance period ends, you’ll need to make up the missed mortgage payments with:
A lump-sum repayment.
A payment plan. This will increase your regular monthly mortgage payments until all the missed payments are repaid.
A mortgage loan modification.
A payment deferral. This is where missed payments get paid back when the house gets sold, the mortgage loan is refinanced, or the mortgage loan matures.
One thing to keep in mind is that loan modification and mortgage forbearance won’t normally be available during foreclosure. So if you’re at risk of going into foreclosure, it’s best to speak with your lender as soon as you can. You’ll want to learn about your options and make a plan to avoid foreclosure as quickly as possible.
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Options for Homeowners Facing Foreclosure
A judicial foreclosure is a foreclosure that involves the courts. These begin when the lender files a foreclosure lawsuit. This is where they try to show that the borrower is in default of the mortgage loan and the lender is legally entitled to take back the home. The judicial foreclosure starts after the lender has given the borrower an opportunity to make up the delinquent payments or come to some other arrangement with the lender, like a loan modification.
An uncontested judicial foreclosure could take a few months to complete. But if the homeowner decides to fight back in court, the foreclosure lawsuit could last several years. Assuming the lender wins the foreclosure lawsuit, they can hold a foreclosure sale to sell the property to the highest bidder.
A nonjudicial foreclosure is a foreclosure that doesn’t involve the courts. It’s usually much faster than a judicial foreclosure. A mortgage company completes the foreclosure legal process in a few months or so. The right to move forward with a nonjudicial foreclosure will normally come from a power of sale clause located in the deed of trust. This authorizes the lender to bypass the courts and begin foreclosing on the property after a default.
Most nonjudicial foreclosures begin when the mortgage servicer or lender files a notice of default. These get filed with the county recorder where the property is located. State law determines how much time the borrower then has to cure the default. Once that deadline passes, the mortgage lender files a notice of sale, which gives the borrower and the general public details about the home’s foreclosure sale.
In a nonjudicial foreclosure, there are usually 30 days from the notice of sale to the foreclosure public auction date. For the most part, a foreclosure sale or auction will be very similar, regardless of whether the lender uses a judicial or nonjudicial foreclosure process. After the foreclosure sale, the homeowner has some time to move out before the new owner starts eviction proceedings.
Selling the House
Until the foreclosure is complete, the homeowner remains the legal owner of their home. This means they can sell the house during the foreclosure process, as long as the sale and mortgage payoff takes place before the foreclosure auction.
If the property sells for a price that’s more than the homeowner’s mortgage loan balance, then the mortgage gets paid off (as well as any other lienholders) and the homeowner keeps the extra money. But if the property sells for less than the outstanding mortgage loan balance, then one of two things can happen: The lender can choose to forgive the deficiency balance or try to collect the deficiency balance from the borrower. The lender’s options will depend on state law.
If your home is underwater — meaning you owe more than it’s worth — you may still be able to sell it through a short sale. This requires the lender’s permission. In a short sale, the lender permits the borrower to sell the home for less than what the borrower owes on the mortgage loan. Depending on the terms of the short sale, the deficiency balance is either forgiven, or the lender may seek a deficiency judgment from a court to recover the deficiency balance.
Filing for Bankruptcy
If you’re facing foreclosure, you can use bankruptcy to temporarily stop the foreclosure process with an automatic stay. An automatic stay puts all collections activities on pause. But whether or not you can keep your home depends on the type of bankruptcy you file. If you’re willing to lose your home to foreclosure and the home has no positive equity, then filing for Chapter 7 bankruptcy after the foreclosure could be the best option. In Chapter 7 bankruptcy, a deficiency balance is an unsecured debt, which means it can be discharged or wiped away in bankruptcy.
If you want to keep your home, consider filing Chapter 13 bankruptcy, which creates a payment plan that gives you a chance to restructure your debts, including their mortgage. Under Chapter 13, you’ll have three to five years to catch up on your delinquent mortgage payments.
Redeeming the Property
Many states have special laws that give homeowners the chance to keep or “redeem” their homes even after foreclosure. This is called the right of redemption. There are two types of redemptions when it comes to foreclosure.
The first is the equitable right of redemption, which exists in all states. This allows you to make up your missed mortgage payments and pay off any other accrued interest, penalties, or fees. The second is the statutory right of redemption which exists in about half of all states. Each state handles this process differently. But generally, after the foreclosure sale occurs, you’ll have a specific time to redeem the property and buy it back. This redemption period can last anywhere from 30 days to one year.
States laws govern what you have to do to redeem your property. In some states, you have to pay the sale price plus costs and interest. In other states, you have to pay the mortgage balance plus costs and interest. In practice, the mortgage balance and sale price will often be the same amount.
Fighting the Foreclosure
Finally, you can choose to fight the foreclosure. When and how you mount your defense will depend on the type of foreclosure you’re facing. Judicial foreclosures automatically allow you to present any defenses. In a nonjudicial foreclosure, you may need to file your own lawsuit to have the chance to explain why you believe the court should step in and stop the foreclosure. Hiring a foreclosure attorney to help you fight the lender in a judicial or nonjudicial foreclosure is strongly recommended though not required.
The foreclosure process begins when the borrower defaults on a mortgage. There are many ways a borrower can default, but one of the most common is failing to make monthly mortgage payments as agreed. The homeowner will have the chance to cure the default or come to some other arrangement to prevent foreclosure. If those attempts fail, the borrower then has several options to consider, such as selling the property, fighting the lender in court, filing bankruptcy, or redeeming the property. No matter what happens, you can pick up the pieces following a foreclosure.