When Can a Bank Foreclose on a Mortgage?

When a bank begins foreclosure on a property, it is taking action on an agreement made at the time of purchase. If you buy real estate and obtain a mortgage loan to help you pay for that investment, you’re entering into an agreement with a lender. 

The lender agrees to lend you the money to buy the home and you, as a borrower, agree to pay that lender back over time, with interest, per the terms of your agreement. This agreement is referred to as a mortgage, or in some states it is called a deed of trust. This is your promise to pay back the loan according to certain terms. If you stop making payments accordingly, the bank is authorized to take action. Depending on numerous factors, this action may include initiation of the foreclosure process. 

The Path To Foreclosure 

A home loan is a secured loan because it is backed by “security”  in the form of property that the bank can take back if the borrower defaults on payment. In accepting the loan, you mortgage the property. This process authorizes the bank to take ownership of the property under certain conditions. When the bank tries to take ownership, they are “foreclosing” on the property. 

Most often, a bank chooses to foreclose because the homeowner has stopped making monthly payments. They might also foreclose if the homeowner transfers the property to a different owner without the bank's permission or the homeowner isn't paying for property insurance. Sometimes, lenders or even governments might foreclose when owners fail to pay property taxes. Under any of these conditions, the homeowner is not upholding their end of the agreement and the bank can take action per the terms of the loan and per safeguards provided by state and/or federal law.

State law and mortgage terms dictate how long the bank must wait before beginning foreclosure on a property. The bank might start foreclosure proceedings after as few as one or two delinquent (missing or late) payments. But foreclosure usually only occurs after many consecutive missed mortgage payments. 

The first step that the bank will take involves sending a “notice of default” to the borrower demanding the delinquent amount, along with any late fees. Instead, homeowners might receive a “notice of acceleration”, which grants the owner a brief time (often 30 days) to pay the balance of the mortgage. If, like most homeowners, they can't pay the full amount, the bank can then legally begin the foreclosure process. 

If you’ve received a notice of default from your lender, you still have time to correct the issue. This period is considered the pre-foreclosure stage. You should contact the lender to see if you can make a plan to make up for missed payments. By paying the delinquent amount, you may be able to resume your previously scheduled monthly payments. If you're unable to pay under the current terms, you might be able to modify your payment schedule or loan terms. And if the bank is foreclosing because of an improper transfer, you might have an opportunity to correct the ownership issue inspiring the foreclosure. 

The Foreclosure Process

The foreclosure timeline depends on your state’s laws, but in a majority of states, a foreclosure begins when the bank files a lawsuit to reclaim the property in question. This is called “judicial foreclosure.”

Once a lawsuit has begun, you will have an opportunity to respond and present your defenses. This is called answering the complaint. You might have valid defenses if the mortgage servicer had problems processing your payment, if you were improperly served the foreclosure notice, or if there are errors or inconsistencies with your mortgage documents. Note, that if you find yourself facing judicial foreclosure, you should consult an attorney to better ensure that you don’t miss the opportunity to raise valid defenses, as some might be waived if not raised early on. 

Although it might take a while, if you don’t present valid defenses and you aren’t able to make up the missed payments or pay off the loan, the bank will take ownership of the property. It will try to sell the property, often at auction to the highest bidder. This is the primary reason why it is so important to answer the summons and complaint - failing to do so will ensure that your property will be taken from you.

The Redemption Period and Onward

The period right after the foreclosure sale is considered the redemption period. During this time, often a few weeks, the homeowner can “redeem” the property by paying the remaining balance. But it is not often that borrowers can afford to take advantage of this option. At the end of the redemption period, if the borrower has not redeemed the property or worked out an alternative arrangement with the lender, the property passes to the new buyer. 

When the foreclosure sale price doesn’t cover the unpaid mortgage, fees, interest, etc. the remaining balance owed is considered a “deficiency balance” and the bank may come after the homeowner for this remainder. If allowed by state law, the bank may seek a deficiency judgment, often adding the costs of foreclosure to the balance. The lender can then use the deficiency judgment to try and recover the unpaid amount from the homeowner. 

Because the foreclosure process is different in each state and you may have an opportunity to resolve matters early on, you should contact a local attorney as soon as you’ve been notified that you’re facing a foreclosure action. An experienced foreclosure attorney can provide legal advice and help you evaluate your options.

Avoiding Foreclosure

If you’re facing foreclosure, you should review your mortgage documents. Though they aren’t often easy to read, these documents will tell you how long the mortgage company has after your account becomes delinquent before the lender can move forward with a foreclosure action. These documents might also outline other protections for homeowners or conditions required by state law and federal law. 

To avoid foreclosure, you’ll want to ensure that you don’t miss details in the terms of your agreement, as failure to honor terms such as a requirement to pay your property taxes or homeowners insurance could lead to foreclosure as well. Sometimes, these extra expenses are included in your monthly payment. But issues can arise when taxes increase, you switch insurance companies, or if the automated payments aren’t processed properly. A small problem like that can sometimes lead to foreclosure if not dealt with early on. 

If you anticipate  that you are going to have difficulty making your payments, you may need to consider whether it’s in your best interest to keep the home. Depending on your lender, you may have options to modify the terms of your mortgage, either on a temporary or permanent basis. 

Loan Modification Or Forbearance

Most lenders offer temporary forbearance, or suspension of payments, for homeowners experiencing temporary hardship. You might also be able to refinance your mortgage at a lower interest rate. Some mortgage lenders are open to negotiating a loan modification and many of these programs have been expanded as a result of the coronavirus pandemic.

Sell The Property

You might also try to sell the property before the bank takes ownership. If you are struggling to make monthly payments and there’s no end to your financial challenges in sight, you might consider listing the property for sale with a motivated real estate agent who can help you sell quickly. The market is hot in many areas of the country right now, so this may be a viable option for you. However, you’ll need to keep in mind that if foreclosure has already begun, you’ll need the bank’s consent before selling. Often, distressed homeowners pursue a “short sale” and sell the property for less than its value, hoping to do so quickly. 

Transfer The Property

Another option might be a “deed in lieu of foreclosure.” This deed transfers property ownership directly to the bank. Because this option allows banks to able to avoid lengthy and costly judicial foreclosures, they will often agree not to pursue a deficiency balance and/or they might grant a longer move-out period. 

This option may also be in your best interest because it avoids a formal foreclosure which can damage your credit score, remaining on your credit report for many years and making it very difficult to buy a home in the future. 

If you are struggling to understand the best choice for you, the Department of Housing and Urban Development (HUD) provides housing counselors to help you explore your options. 

Let’s Summarize...

If you are facing foreclosure, you should immediately contact your lender. By contacting your lender early on in this process, you may preserve options that could allow you to keep your home. Because foreclosure can be a drawn out legal process, banks are eager to avoid foreclosure too. 

You might be able to get back on track by making up the missed payments. You may be able to negotiate a modified payment schedule or loan terms. If you can't resume making payments, you might still be able to transfer ownership before the bank takes the property. You could sell the property to pay the unpaid mortgage or even transfer the property directly to the lender and avoid long-term damage to your credit. 

If you are unsure what to do, seek counsel from an experienced attorney and consider resources from federal agencies such as HUD or the CPFB (Consumer Financial Protection Bureau). By taking action early, you can exercise whatever option best fits your circumstances, needs, and priorities.