Guide to Foreclosure — Important Questions & Answers

Many homes and other real estate in the United States have been purchased using mortgage loans. Having a mortgage means that the borrower has legal ownership of the property, but the property serves as a collateral to secure the loan. If homeowners don’t make their mortgage payments, their property may become subject to foreclosure. In this guide, we’ll provide an overview of foreclosures, including how they work and ways that homeowners can defend themselves during the foreclosure process.

Understanding Foreclosure

Real estate is expensive, so most people enter into a mortgage agreement to purchase their home. A mortgage turns the property into collateral in case the borrower defaults on the mortgage. If a borrower stops making payments for several months in a row, the lender may foreclose on the property. Foreclosure is a legal process whereby the mortgage lender takes back the mortgaged property to recover the money that the borrower owes the bank.

How Long Does It Take for Foreclosure To Happen?

According to ATTOM Data Solutions, properties that went into foreclosure during the last three months of 2020 were affected by the foreclosure process for an average of 857 days. These properties were formally foreclosed upon. Other properties not evaluated in this figure were eventually taken out of the foreclosure process when the borrowers involved became current on their loans or worked out alternative arrangements with their lenders. 

The exact amount of time that the foreclosure process takes depends on several variables. The lender’s approach, terms of the mortgage agreement, and each state’s specific foreclosure laws all impact the length of the foreclosure process. Another factor to consider is that there has recently been a foreclosure moratorium in place because of the coronavirus. This mandatory “pause” in foreclosure actions has affected how long certain foreclosure processes have lasted and/or will last.

Per the terms of a typical residential home mortgage, the foreclosure process does not begin until about six months after the first missed mortgage payment. Lenders don’t like to foreclose, as it’s a costly and time-consuming process. They would rather have borrowers make alternate arrangements to become current on their loans.

If you’ve missed making a mortgage payment, you should get in touch with your mortgage servicer to discuss what options you have available to you that can help you to avoid foreclosure. You should make this call as soon as possible, as the loss mitigation process is time-sensitive. Chances are good that the lender will try to make arrangements to help you get back on track with your mortgage. But if those attempts fail, your lender may begin the process of foreclosing on your home.

The Foreclosure Process

The precise steps involved in pre-foreclosure and foreclosure proceedings will depend on the location of the foreclosed property. However, most states have a foreclosure process that follows the steps below.

The first step takes place after the homeowner misses a mortgage payment. The bank will send a notice to the borrower reminding them of nonpayment. 

The second step occurs if the homeowner misses a second mortgage payment. The bank may send a demand letter now or after additional missed payments. This letter will explain that the borrower may be in default and what may happen if they do not cure the default. The demand letter will also explain what the homeowner can do to become current with the mortgage.

The third step is the reinstatement period. The bank will send the borrower a notice of default by mail and/or post the letter on the property. Depending on state law and the terms of the mortgage, the homeowner may have an additional 90 days to make up all of the missed payments to have the loan reinstated.

Assuming that the loan is not reinstated, step four involves a trustee recording a notice of default at the county clerk’s office in the same county where the property is located. Next, the lender must provide notice of its intent to sell the property. This public notice gets sent to the homeowner, posted on the property, and is usually published in a local paper. 

Step five is the foreclosure sale, which is often a public auction whereby the property goes to the highest bidder. At the end of the foreclosure auction, the new owner may have the right to take immediate possession of the foreclosed property but the original owner is usually afforded a “right of redemption” by which they can still purchase their property back within a specific amount of time. 

If the property is not sold at auction, it may remain in the lender’s possession and become a “bank owned” or REO (real estate owned) property. If the property gets sold, but not at a high enough price to cover what the homeowner owes on the mortgage, there may be a deficiency balance that the homeowner may be held responsible for paying. If state law allows for it, mortgage companies can go after the homeowner for this amount by securing a deficiency judgment, and use debt collection tools like wage garnishment to collect on the judgment. 

The sixth and final step is eviction. The occupants of the foreclosed property will likely be entitled to some time after the foreclosure sale before they will be compelled to move out. If they don’t, a local sheriff may arrive to remove the occupants and their personal belongings.

Keep in mind that the exact process, including the terminology and applicable rules, are state specific. How foreclosures work in one state will differ in another state, but the overall process will be similar.

Types of Foreclosure

There are three major types of foreclosure: 

• Judicial

• Nonjudicial

• Strict foreclosure

A judicial foreclosure is a foreclosure wherein the lender must file a foreclosure lawsuit before it can foreclose on a property. Without court approval, the foreclosure cannot take place. If the homeowner decides to contest the foreclosure in court, the judicial foreclosure process can take years. All states permit judicial foreclosures and in some states like New York, judicial foreclosures are the only type of foreclosures permitted.

A nonjudicial foreclosure allows the lender to sell the property without having to first go to court. Not all states permit nonjudicial foreclosures, but in states that do, the ability for a bank to begin the nonjudicial foreclosure process typically comes from a power of sale provision in the property’s deed of trust.

To use nonjudicial foreclosure, the lender must first provide the necessary notices and abide by the waiting period for the homeowner to become current on the mortgage. Lenders like nonjudicial foreclosures because they are faster than judicial foreclosures, although there may still be some level of judicial oversight. About half the states allow nonjudicial foreclosures.

Very few states permit strict foreclosures. These are similar to judicial foreclosures in that the lender must file a lawsuit asking the court to grant an order stating that the homeowner is in default of the mortgage. But unlike a judicial foreclosure, if the court grants this order, there is no public auction or foreclosure sale for the property. Instead, legal ownership of the property automatically transfers to the lender. 

Strict foreclosures are common when a property is “underwater,” meaning that the money the borrower owes exceeds the property’s fair market value.

Your Rights During and After the Foreclosure Process

During the foreclosure process, you have certain legal rights. For instance, if you have a government-backed mortgage, such as one from Fannie Mae or HUD, lenders may not start foreclosure proceedings against you or finalize a foreclosure judgment or sale until at least June 30, 2021, due to a mandatory forbearance period instated as a result of the COVID-19 pandemic.

Lenders must also take steps to work with you to help you avoid foreclosure. This “loss mitigation” process can include opportunities such as forbearance, loan modification, reinstatement, and a repayment plan. 

If you’re going through a judicial foreclosure, the lender must comply with the Fair Debt Collection Practices Act (FDCPA).

Finally, each state has laws in place to impose notice and waiting period requirements for many of the steps involved in the foreclosure process. These include how long the lender must wait until they can hold a foreclosure sale, where these notices must get published, and information that must be included in the notices. 

After a foreclosure is complete, some homeowners may be able to take advantage of a right of redemption. 

This right of redemption provides a homeowner with an opportunity to get their home back. To reassume ownership of the property, the borrower must pay the entire amount due, plus any interest, penalties, fees, and costs. The right to redeem is available in at least 15 states and any redemption period automatically receives a 60-day extension if the homeowner files for bankruptcy. 

How Can I Keep My House and Avoid Foreclosure?

The best way to keep your house is to avoid foreclosure. Thankfully there are several options to help you accomplish this goal, even if you’ve fallen behind on your payments. In fact, lenders are required to make efforts aimed at allowing you to remain in your home before they initiate foreclosure proceedings. Some of the options available may include:

• Loan modification: A lender will modify the loan to make it easier for the borrower to make payments. Modifications might consist of lowering the interest rate and/or extending the mortgage loan’s term.

• Forbearance: The lender allows the borrower to pause making mortgage payments or allows them to make payments at a reduced rate for a set period of time. Forbearance during a foreclosure is a pause of the foreclosure process so that the borrower can catch up on missed mortgage payments but this option can also be used by borrowers who are not yet in default as a means to avoid defaulting.

• Repayment plan: A borrower’s monthly mortgage payments will temporarily increase because the lender will add portions of the overdue amount to the current payment obligation. The goal is to help the borrower get caught up on the mortgage over time.

• Refinance: The borrower gets a new loan to pay off the existing mortgage. The new loan is usually smaller, or may have a better interest rate, which means lower monthly payments for the borrower. The lender agrees to take this loss because refinancing costs the lender less money than a foreclosure.

• Chapter 13 bankruptcy: During the Chapter 13 bankruptcy process, homeowners will have three to five years to catch up on mortgage arrears. 

Alternatives to Foreclosure Even if You Can’t Keep Your House

Sometimes, a homeowner simply can’t afford to keep their house. But there are still opportunities to avoid a foreclosure, including:

• Cash for keys: The eviction process can be difficult for a lender. To encourage a homeowner to cooperate during the eviction process, the lender or new owner of the property may offer a cash payment. The purpose of this payment is to have the previous homeowner move out of the property by a set deadline and leave the property in “broom swept” clean condition. 

• Deed in lieu of foreclosure: The homeowner gives the lender legal ownership of the property. In return, the lender will skip the foreclosure process and consider the loan paid in full.

• Short sale: The homeowner sells the property for an amount less than what they owe under the mortgage. The proceeds from the sale go to the lender and any difference is either forgiven or the lender gets a deficiency judgment against the homeowner. Going through the hassle of selling the house may be worth it due to the fact that foreclosure results in a massive hit on the borrower’s credit score, whereas the impacts of a short sale on one’s credit history are less intense.

• Regular sale: The homeowner completes a regular home sale to a buyer and uses the proceeds from the sale to pay off the mortgage. This only works if the property value is high enough for the sale to fetch more than the balance left on the mortgage. 

Defenses to Foreclosure

A homeowner may have several legal defenses to stop or delay a foreclosure.

First, the bank may not follow proper foreclosure procedures as required by federal or state laws. Perhaps a specific notice wasn’t provided at the correct time or the bank acted before a waiting period had passed.

Second, there is a defective declaration or affidavit. Depending on the state, a bank may have to sign a declaration or affidavit confirming that it completed certain legal requirements for foreclosure. Sometimes a bank will sign a declaration or affidavit without taking steps to make sure that this confirmation is accurate.

Third, the lender may have missed the statute of limitations deadline. Statute of limitations is a legal concept that means legal actions must start within a certain time period. If a bank files a foreclosure lawsuit years after you made your last mortgage payment, the law may prevent them from foreclosing on your home.

Fourth, the bank may not be able to prove that it owns your mortgage. Many banks that issue mortgages will sell them to another mortgage company. By the time there’s a foreclosure, there’s confusion as to who owns the mortgage.

Fifth, the bank or lender may have made a serious mistake. An example could include a homeowner making monthly mortgage payments, but the bank has credited the payments to another homeowner. 

Let’s Summarize...

If you have defaulted on your mortgage loan and are facing foreclosure, it might seem like an impossible task to keep your home. But there are a variety of financial and legal tools available to stop a foreclosure action so that you can either keep your home or protect your credit and financial health if you must find a new place to live. If you’ve missed a few mortgage payments or are about to miss your first one, don’t ignore the foreclosure notices. Contact your lender to discuss ways to avoid foreclosure.