If you’re facing a foreclosure, it's important to know how the process works and what options you have. This article gives a brief overview of how foreclosure works, including a breakdown of the fees involved.
Written by Attorney Aan Malahia Chaudhry.
Updated November 29, 2021
Defaulting on your mortgage payments puts your property at risk of foreclosure. This process can be stressful and costly for borrowers. If you’re facing a foreclosure, it's important to know how the process works and what options you have. This article gives a brief overview of how foreclosure works, including a breakdown of the fees involved.
How Foreclosure Works
When a borrower fails to make mortgage payments or pay property taxes and homeowners association (HOA) fees, the lender can go through the legal process of foreclosure. Lenders usually initiate foreclosure after a homeowner misses 3-6 months of mortgage payments. When lenders foreclose, they take back, or repossess, the home and sell it. While foreclosures vary by state, there are two general types: judicial and nonjudicial.
All states have judicial foreclosures. If you are facing a judicial foreclosure, an attorney will file a lawsuit against you on behalf of the lender, and you’ll receive a complaint document. You then generally have 30 days to respond with an answer. You should respond to the complaint and establish a defense if you have one. This will help slow the foreclosure process down.
If you don’t answer, the court will grant the foreclosure and set a sale date. The foreclosure sale will usually be an auction where the highest bidder gets the home.
The other type of foreclosures are nonjudicial foreclosures, but not all states have these. These foreclosures don’t generally involve the courts. If you are facing a nonjudicial foreclosure, you will receive a notice of default and a deadline to address the default. If you are unable to catch up with your mortgage loan payments in that time — aka cure the default — the lender will issue a notice of sale. Like a judicial foreclosure, the sale usually occurs through a public auction.
Consequences of Foreclosure
Going through a foreclosure can be stressful and have long-lasting consequences. You will lose your home and may not even know when you will be evicted. A foreclosure can also damage your credit, which can affect your ability to get a new mortgage and other loans. The missed payments that led to the foreclosure can decrease your credit score by 70 to 135 points. Also, when you’re looking to buy another house, if you have a foreclosure on your credit report most lenders will require you to wait for 5-7 years.
To avoid foreclosure and its hit to your credit, consider applying for loss mitigation with your lender. One such option is a short sale, where you voluntarily sell your house before foreclosure. This usually results in a sale price that is short of the total balance due, which is where this gets its name. Another option is a deed in lieu of foreclosure. Here, you sign the deed to your house over to the lender and in exchange, you are freed from your mortgage obligations. Your lender must agree to both of these options.
Short sales and deeds in lieu of foreclosure are better than a foreclosure because they will have less of a negative effect on your credit history and your ability to apply for future mortgages. Other loss mitigation options include loan modification, a forbearance agreement, and a repayment plan. Applying for one of these options can help delay your foreclosure until your case is reviewed.
Additionally, you can file for Chapter 7 bankruptcy or redeem the mortgage. If you file for Chapter 7 bankruptcy, you may be able to delay the foreclosure for a few months. Chapter 13 bankruptcy is another option that allows you to keep your home by letting you pay off your mortgage in the form of arrearages (late payments) over the course of your 3-5 year bankruptcy plan. Some states also have mediation programs that offer settlement conferences. You may also be able to get help from the government or nonprofits.
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Mortgage agreements allow lenders to charge borrowers fees when they default on their mortgage and a foreclosure is pending. Examples include late fees, inspection fees, and foreclosure costs. These fees plus the missed payments that led to the foreclosure — which include the principal, interest, taxes, and insurance — can really add up. While the missed payments will account for most of the money the borrower owes after the default, the additional foreclosure costs and fees can also be substantial.
Attorneys & Legal Fees
Attorney and legal fees will vary depending on the type of foreclosure process and the attorney’s fee structure. While you may choose to hire your own foreclosure attorney, the lender will also hire an attorney to represent them in the foreclosure process. Most mortgages require the homeowner to pay the lender's attorney fees as well. Depending on the type of fee structure the attorney uses, you could pay a few hundred (per hour) or a few thousand (for a flat rate) in attorney’s fees. Lenders may also charge you other legal fees to cover the cost of auction notices, filing fees, sheriff’s charges, service of process, and certified mailings.
Foreclosure attorneys can charge a flat rate, an hourly fee, or a monthly fee. If your foreclosure is complex and takes a long time, these fees can add up, especially if the attorney has an hourly fee structure.
Title Search Expenses
Title searches are required for foreclosures and real estate sales. A title search confirms the legal owner of the title and determines if any other claims or liens are on the property. Title searches can take anywhere from a few hours to a few days for older homes with lengthier records. Fees for title searches can be a few hundred dollars.
Pre-Acceleration Late Charges
Your mortgage or deed of trust will likely contain an acceleration clause. Acceleration of the loan initiates the foreclosure procedure. Once a loan has been accelerated, the servicer can’t charge any more late charges. But loan servicers are allowed to charge late fees before the note has been accelerated.
Private Process Server Costs
For the lender to foreclose on a borrower's property, the homeowner must be sued in a civil lawsuit in states with judicial foreclosures. In these cases, a summons and complaint must be served on the homeowner by a process server, which usually costs under a hundred dollars.
Property Preservation Fees
Property preservation simply means maintaining properties as they are. It generally requires a walkthrough property inspection and occasional drive-by inspections. The homeowner pays the inspection costs. If the property needs repairs, trash removal, or lawn maintenance the borrower is responsible for paying. But property preservation fees must be reasonable.
How To Challenge Incorrect Fees in Foreclosure
When you are facing foreclosure it’s important to be aware of these fees so you can dispute any incorrect charges. The loan servicer (the company that handles the loan account) may charge excessive fees or inaccurate amounts.
For example, lenders commonly make errors when calculating missed payment fees. If servicers delay updating paid amounts, it may appear as if you have missed a payment. Additionally, your mortgage contract likely has a grace period, usually around 10-15 days. If you make a payment in this period you should not be charged a late fee. This is why it’s important to keep a record of all payments you make.
Your loan servicer may also charge late fees that are greater than what’s allowed by state or federal law. These laws generally override the fee indicated in your mortgage documents.
Any fee or cost charged to you in a foreclosure case must be reasonable. This means that the fees are in line with state limits and are similar to other comparable costs in your area. If you feel that you are being charged too much, you can defend yourself against improper fees. If your loan servicer miscalculates fees, you may be able to use this as a potential foreclosure defense.
Also, if your servicer didn’t provide you with a breach letter to inform you about the default, you may have a breach of contract defense. Breach letters are important because they give you a chance to cure the default and avoid foreclosure. Additionally, your lender may have violated usury laws, which are state-specific interest rate laws that govern how much interest lenders can charge on loans.
If you are facing foreclosure, you should compare the fees you've been charged and the notices you've received with the applicable foreclosure laws. If you find incorrect fees, or if you are unacquainted with foreclosure laws, then you should seek professional advice from a foreclosure attorney. Some attorneys will offer free consultations or help for low-income individuals.
If you are facing a foreclosure you need to know how the process works and what you can do to avoid losing your home. Foreclosure comes with many consequences, but a sometimes overlooked aspect is the cost. Lenders charge various foreclosure fees, and the total cost of these fees can add up. It’s important to be aware of the fees associated with a mortgage default. Knowing these can enable you to dispute incorrect charges if they show up.