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We know that when we don’t pay our mortgage, it’ll only be a matter of time before the foreclosure process begins. But, what does that process look like? Will you get locked out of your house once you’re served the eviction warrant? Do you have time to get caught up or are you doomed to lose the property?
The foreclosure process is not an easy thing to go through. It is complicated, complex, and downright stressful. Although most states have specific laws regarding this process, this article will discuss the basics to help give you a better understanding of what’s to come.
If you default on a loan, the lender has the legal right to repossess the property used as collateral. The term, “foreclosure” refers to the process that the lender must go through in order to repossess the house, sell it, and use the money to satisfy the outstanding balance on the loan.
This seems easy enough in theory. However, other than experts who deal with foreclosures on a regular basis, a lot of people don’t understand all of the steps associated with the foreclosure process.
Considering how complicated the process is, how it can change from state to state, and how each mortgage agreement can have different terms, it’s no wonder people panic when they receive a foreclosure notice.
Despite this, having a solid understanding of the process is necessary because sticking to the steps involved can significantly impact how long it takes, the overall cost, and the outcome it achieves.
In most cases, the foreclosure process will begin once you fall behind on your mortgage payments. Federal law states that your lender cannot start the proceedings until you’re 120 days late–or you’ve missed four (4) mortgage payments (this can vary depending on your state).
If you know that you cannot make payments, now is the time to reach out to your lender and see what options you have. Usually, it’s in a lender’s best interest to work with borrowers who are in a financial bind because then it is to let them go into default. We’ll cover these options later in this article.
Upon falling into default, your lender will send you a “Notice of Default,” which details why they’re sending you the notice, how far behind you are on your payments, and how much time you have to bring your account in good standing. If you don’t remit payment by the time stated in the notice, the lender is likely to begin the foreclosure process.
If you’re unable to get your accounts out of the red within the time specified in the Notice of Default, the lender will file a “Notice of Sale“-a notice that publicly states that your home will be available for sale in the near future.
The way the Notice of Sale is published will differ depending on the state where the property is located. For example, California requires the Notice of Sale must be displayed in a public area, as well as on the property itself. North Carolina, however, allows the Notice of Sale to be published in the local newspaper and put on the door of the local courthouse.
Once the Notice of Sale is published, interested buyers and investors may begin showing signs of being interested in your home. Your state will have laws in place that determine whether or not you’re able to use your exercise your Right to Redemption (the ability to reclaim your property up to, or even after, the sale of your foreclosed home).
The sale of the property occurs in an auction, typically held by the local sheriff’s office. Because there is not enough interest from potential buyers, banks or lending companies are frequently forced to acquire the homes back.
The lenders then have to try to sell the properties to buyers directly. These properties are then called “bank-owned” or “real-estate-owned” properties (REO properties). These homes are usually advertised on the lender’s website, or on a third party’s website.
Once your property is sold, you’ll be evicted from your home. You’ll usually have only a few days to pack your things and move. If you don’t leave on your own volition, your local law enforcement will lock you out and remove your belongings.
The type of foreclosure that can happen depends on where you live and how your mortgage is set up. Some foreclosures need to go to court, while others don’t. Foreclosures can be broken down into the following categories:
| States That Mandate Judicial Foreclosure: | |||
| Connecticut | Indiana | Nebraska (Sometimes) | Oklahoma (At Homeowner’s Request) |
| Delaware | Iowa | New Jersey | Pennsylvania |
| Washington DC (Sometimes) | Kansas | New Mexico | South Carolina |
| Florida | Kentucky | New York | South Dakota (At Homeowner’s Request) |
| Hawaii | Louisiana (Executory Proceeding) | North Dakota | Vermont |
| Illinois | Maine | Ohio | Wisconsin |
| States That Allow Power of Sale Foreclosures: | ||||
| Alabama | Washington DC (Sometimes) | Michigan | Nevada | South Dakota |
| Alaska | Georgia | Minnesota | New Hampshire | Tennessee |
| Arizona | Hawaii (Sometimes) | Mississippi | North Carolina | Texas |
| Arkansas | Idaho | Missouri | Oregon | Utah |
| California | Maryland | Montana | Rhode Island | Washington |
| Colorado | Massachusetts | Nebraska | South Dakota | West Virginia |
| Wyoming | ||||
If you’ve missed a mortgage payment, you won’t be foreclosed on automatically. A mortgage payment that’s 30 days late is considered mortgage delinquent and you’ll be slapped with late fees and your credit score may drop a little… But you’ll still have your home.
If you’re 120 days late on your mortgage payments, you’re in pre-foreclosure. At this point, there are a few ways you can avoid foreclosure.
The choice to refinance depends on your specific financial condition. It’s possible that getting a refinance could help you bring down your monthly mortgage payment. The only caveat is that you have to refinance before you actually miss a payment. Essentially, refinancing is something you do when you know that you’re going to have problems paying your mortgage.
If you need your mortgage terms modified, your lender should be able to modify the terms. They could offer a longer repayment period, a fixed interest rate, or even lower the interest rate. It all depends on your credit score and your lender, of course.
Modifying your mortgage terms could give you the chance to make payments on a new date. For example, if you change jobs and you need your mortgage due date to change to another date, your lender may be able to do this. It’s important to reach out to your lender as soon as you are aware that there will be a problem so they can work with you as best as they can.
Forbearance is when your lender gives you a brief break from making your monthly payments. If you’re going through a short-term financial problem, this relief can give you the breathing room to get your finances back on track.
If you’re aware that you’re going to be unable to make a mortgage payment–don’t wait. Reach out to your lender and let them know what’s going on. They’re more likely to work with you before you fall behind rather than when you’re more than 30 days late.
Your lender may agree to a new repayment schedule if you need to catch up on your payments. This option should allow you to make up for your missed payments without paying a large amount at one clip.
Negotiations about a repayment plan often follow mortgage forbearance. If you need help keeping up with your payments, talk to your lender about implementing a repayment plan. Just keep in mind that the typical length of time for mortgage repayment is less than six months.
If you can sell your home for less than you owe on the loan, and if your lender agrees, you could have the opportunity to keep it out of foreclosure. This type of deal is known as a “short sale.”
Suppose your property is in a state allowing lenders to sue for a deficiency judgment following a short sale. In that case, you should get your lender’s written permission to release you from the obligation to repay the deficiency. This is especially important if you live in a state that permits lenders to sue for a deficiency judgment. However, if the lender agrees to forgive the deficiency, you may be subject to the tax implications we mentioned above.
You can avoid foreclosure by transferring property ownership to your lender through something called a “deed in lieu of foreclosure.” where your mortgage debt is forgiven in exchange for the property’s deed. Your credit might take a hit regardless of whether or not a foreclosure appears on your credit report, but you do lose your property and whatever equity you may have accumulated with it.
No matter the circumstances, losing your house through foreclosure or deed in lieu of foreclosure is never a good option. Before settling on this path, you must weigh all of your options.
There’s no way to sugar-coat this… Once you lose a property to foreclosure, your credit score is going to take a hit. Your credit score could drop by 100 points and you could feel those effects for seven years!
That lower credit score can make your life so much more difficult, especially if you’re trying to get financing for other investments, credit cards, or even find a new job! Yes, employers check credit scores when hiring new employees, especially when money, sensitive data, and security concerns are involved.
Other than hurting your credit, going through a foreclosure could affect your taxes. If the loan was recourse or nonrecourse, the foreclosure will have different tax implications.
For federal income tax reasons, debt forgiveness is treated as capital gains, which is something that many people don’t realize. For example, if you owe $300,000 on your home and the bank forgives $100,000 after you sell it in foreclosure for $200,000, you must include $100,000 in income on your tax return.
During the foreclosure process, most lenders will make several attempts to negotiate repayment terms with you if you’re late on your mortgage payments. They don’t want to be bothered with trying to sell a foreclosed property to get the money they’re owed. If there’s a chance that you’ll be able to catch up on your payments, it’s in your best interest to reach out to your lender as soon as possible to negotiate ways to get you back on track.
You may have to consult a housing assistant or reach out to work with your lender directly. Through the Housing and Urban Development’s (HUD) Housing Counseling Program, you’ll have access to free counseling. The housing counselors can help guide you through your options and make recommendations regarding which option would be most helpful for your particular situation.
When you take a proactive approach and be honest with your lenders, you might be surprised how accommodating they’ll be to avoid the foreclosure process!
Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
