When Does the Foreclosure Process Actually Start?

Foreclosure can be a confusing and complicated process. Each state has its own laws outlining the foreclosure process. Plus each mortgage contract includes its own terms as well. For example, these terms will note whether the foreclosure requires court approval or can take place outside of court. Despite the differences, most foreclosures have a pre-foreclosure period. In this article, we’ll discuss the pre-foreclosure period and the major steps in the foreclosure process.

Beginning of the Foreclosure Process 

The pre-foreclosure period is the time before the foreclosure process begins. This period lasts for at least 120 days and starts when a homeowner is first late with a mortgage payment. Federal law prevents loan servicers from foreclosing on a property until the borrower is more than 120 days late with their payments. When the pre-foreclosure period ends, foreclosure can begin.

Homeowners also have additional foreclosure rights and protections under federal law. For example, during the pre-foreclosure period, lenders must offer loss mitigation to borrowers. If a homeowner applies for loss mitigation, the loan servicer must review the application and make a decision before foreclosing on the homeowner’s property. The exact amount of time it takes to complete the foreclosure process can widely vary depending on which state you’re in, what loss mitigation options you’ve pursued, and what type of foreclosure you’re facing.

A foreclosure can be either judicial or nonjudicial. Judicial foreclosures require court approval. Nonjudicial foreclosures don’t involve the courts. As a result, nonjudicial foreclosures often happen much faster than judicial foreclosures. But no matter the type of foreclosure, borrowers can expect a foreclosure notice from their lender.

Foreclosure Notice

Before a lender can foreclose, they must give the borrower notice. Most mortgages and deeds of trust have a clause that requires the lender to send a notice to the borrower telling them when they’re in default. Depending on the state where the property is located and the terms of the mortgage documents, this notice could be called a breach letter, a pre-foreclosure notice, or a Notice of Default. Until the homeowner receives this notice, the foreclosure process can’t begin and the lender can’t use the acceleration clause that exists in most mortgages.

The acceleration clause allows the lender to demand the entire balance of the mortgage loan from the borrower. Unless the borrower can pay their entire mortgage loan balance, the mortgage servicer can foreclose on the property. But, again, this can’t happen until notice is given.

The format of the foreclosure notice can vary widely, but will usually contain the following information:

• Why the borrower is in default — most foreclosures are the result of a default due to missed mortgage payments.

• What the borrower must do to cure the default — this typically requires the borrower to become current with their mortgage payments.

• How much time the borrower has to cure or address the default — most lenders will give borrowers between 30 and 90 days.

• A warning to the borrower about what happens if they can’t cure the default in time — risks include acceleration of the mortgage loan, foreclosure proceedings, and sale of the property.

Loss Mitigation Options

One of the benefits of the 120-day pre-foreclosure period is that the homeowner has a chance to cure the default. Alternatively, they can use this time to negotiate a loss mitigation option. What’s available through loss mitigation will vary among lenders, but loss mitigation could include:

• Mortgage forbearance;

• Mortgage loan modification; or

• A repayment plan.

If you apply for loss mitigation, your loan servicer must review and decide on your application before they can begin foreclosure. Because of this, loss mitigation can sometimes delay the foreclosure process. This could be helpful if you’re trying to find a buyer for your home, for instance.

Under federal law, you receive special protections if you submit a loss mitigation application at least 37 days before a foreclosure sale. If you do this, your lender can’t ask the court for a judgment ordering a foreclosure sale or hold a foreclosure sale until the lender has:

• Denied your loss mitigation application and any applicable time for appeal has expired; 

• Offered you a loss mitigation option that you’ve rejected; or

• Granted you loss mitigation, but you’ve failed to abide by its terms.

Assuming that neither loss mitigation nor a mortgage relief program has worked out, foreclosure is likely to begin soon.

Foreclosure Timeline

The precise foreclosure timeline depends on state law and the terms of your mortgage loan. But generally speaking, there are six stages to the foreclosure process.

Stage 1: Missed Payment  

Foreclosure isn’t going to be a possibility unless you miss multiple payments. Remember, federal law requires you to be at least 120 days late on your mortgage payments before your lender can foreclose. And because your mortgage payments are due each month, this can result in up to four missed payments before foreclosure. Keep in mind that your mortgage documents may also explain how many late payments it takes before the lender can start the foreclosure process.

It might require only four missed payments to start foreclosure. But it usually only requires two missed payments to be in default. After the first missed payment, your lender will send you a missed payment notice. After the second missed payment, they may send you a demand letter, which is far more serious than a missed payment letter.

Stage 2: Breach Letter/Notice of Default 

If you miss three payments (you’re 90 days delinquent), your lender will send you a notice of default. This is also sometimes called a breach letter. Your lender may place a copy of the notice on your property and inform you that the notice will be publicly recorded. 

In the notice of default, your lender will let you know how much time you have to cure the default and reinstate your loan. This is called the reinstatement period. It typically lasts 30 to 90 days. If your lender will use a judicial foreclosure, this is also when it will file a foreclosure lawsuit.

Stage 3: Notice of Sale

In a judicial foreclosure, the lender will explain to the court why they’re legally entitled to foreclose on the mortgaged property. At this time, you can fight the lender in court by asserting one or more foreclosure defenses. If the lender wins, the court will order the sale of your property. This judicial process can take anywhere from a few months to a few years to complete.

In a nonjudicial foreclosure, the lender files a notice of sale of the property in the county where the property is located. The lender may also publish the notice of sale in a local newspaper and mail a copy to the homeowner. The notice of sale will often contain the following information:

• A description of the property, including its address and/or legal description

• Identity of the property owner(s)

• Notice that the property will go up for sale at a foreclosure auction open to the public

• The time, date, and location of the foreclosure sale

The ability for a lender to proceed with a nonjudicial foreclosure often comes from a mortgage with a power of sale clause or loans secured by a deed of trust. Both of these instruments allow mortgage servicers to avoid going to court to foreclose.

In the case of strict foreclosure, lenders must obtain court approval first. This is similar to nonjudicial foreclosure except that if the court grants foreclosure, there’s no foreclosure sale or auction. Instead, after the court authorizes foreclosure, the property automatically goes back to the mortgage holder. Strict foreclosures are available in only a handful of states and typically take place only when the mortgage is underwater. An underwater mortgage exists when the fair market value of the home is less than the current balance on the mortgage loan.

Stage 4: Sale of Property

If the lender satisfies the foreclosure requirements, the property will go to a public auction. The goal of the lender is to get rid of the property while also recovering the full amount of the outstanding mortgage balance.

The lender conducting the sale will calculate an opening or minimum bid. The lender creates this number by taking the outstanding balance of the mortgage loan. They then add any liens, unpaid taxes, penalties, interest, fees, and administrative costs associated with the foreclosure.

Assuming the minimum selling price is met, the property will get sold to the highest bidder. But to complete the transaction, the winning bidder must also meet the necessary bidding requirements. This often includes having the ability to pay the full purchase price in cash and making an initial deposit before bidding. Depending on the locality and terms of the sale, the buyer will either pay the entire purchase price after the foreclosure sale or they may pay a percentage, with the remaining balance to be paid soon after.

Stage 5: Real Estate Owned (REO)

If the property fails to sell at the public auction (which is common), the lender becomes the owner of the property. These are often referred to as real-estate owned (REO) properties. Here, the lender may retain a real estate broker or REO asset manager to find a buyer for the property and help with upkeep until the property sells.

Stage 6: Eviction

Even after the lender forecloses on a property, the homeowner will continue living there until the property gets sold. This sale can take place either at a foreclosure or REO sale. Either way, after the new buyer completes the purchase, the homeowner will have a limited amount of time to move out. 

If the homeowner doesn’t leave by the deadline, the new owner of the property can proceed with the eviction process. Assuming they’re successful, the homeowner will receive an eviction notice. If they still refuse to move out, a sheriff’s deputy will usually carry out the physical act of removing a homeowner from the property.

Let's Summarize... 

Under federal law, loan servicers must generally wait until a borrower is at least 120 days late with their mortgage payments before foreclosing on a home. During this time, homeowners can become current on their mortgage and/or make use of loss mitigation or foreclosure relief. Due to the costs of foreclosure, most lenders are willing to work with borrowers to find a way to avoid foreclosure.

Even though each state and local jurisdiction has its own foreclosure process, there are usually six stages. This includes a 30 to 90 days period for the homeowner to become current on their mortgage payments and reinstate the loan.