You may know someone who lost a home to foreclosure, but you might not know all the ins and outs of the process.
When the lender takes back a property when the mortgage has not been paid for a specified period of time, that’s a mortgage foreclosure. The process varies by state and by lender, but there are things you can do to avoid it.
Here’s what you need to know about foreclosure, as the numbers began rising, and moves you can make if you’re facing it.
What Does Foreclosure Mean?
When a buyer finances a home, the mortgage is secured with the property, meaning the property is used as collateral on the loan. If the homeowner fails to make the agreed-upon payments on the due dates, the lender can take the property back.
Each state has its own laws regarding foreclosure. Where you live will determine how properties are foreclosed. There are two main types of mortgage foreclosure.
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Recommended: Help Center for Mortgages
Types of Mortgage Foreclosure
In some states, the lender is required to go through the court system to foreclose on a property. This is known as judicial foreclosure. In other states, the lender does not have to go through the court process.
With a judicial foreclosure, a lender must get a court order to foreclose on a property. The lender must file a complaint with the court, which is also sent to the homeowner and any other lienholders. Generally, the mortgage note must also be filed with the court.
Some states require loss mitigation efforts before a suit can be filed. Most of these foreclosures are not contested, resulting in a default judgment against the homeowner.
After this, the property may be scheduled for sale (usually a sheriff’s auction). The homeowner may appeal the foreclosure judgment.
In a nonjudicial foreclosure, deeds of trust can be foreclosed without going through the court system. Lenders must give special notice to the property owner and wait a specified amount of time before auctioning the property off.
Some states allow both judicial and nonjudicial foreclosure, while others may only allow one or the other. Below is a summary of states and what process they follow for mortgage foreclosure.
|District of Columbia||Primarily nonjudicial|
|New Hampshire||Primarily nonjudicial|
|New Jersey||Primarily judicial|
|New Mexico||Primarily nonjudicial|
|New York||Primarily judicial|
|North Carolina||Primarily nonjudicial|
|North Dakota||Primarily judicial|
|Puerto Rico||Primarily judicial|
|Rhode Island||Primarily nonjudicial|
|South Carolina||Primarily judicial|
|South Dakota||Primarily nonjudicial|
|West Virginia||Primarily nonjudicial|
When Does Mortgage Foreclosure Begin?
Mortgage foreclosure begins with the first missed payment, though a lender’s actions will escalate the more payments a homeowner misses. With the first missed payment, the mortgage lender won’t take the property back, or even issue a notice of default, but will reach out to the borrower to help them get payments back on track.
The lender will also report a nonpayment or late payment to the credit bureaus and issue a late fee.
Typically, lenders won’t issue a notice of default until three missed payments, or 90 days past due (this is standard practice, but lenders can issue a notice of default sooner than 90 days). Default is the precursor to foreclosure.
Foreclosure Timeline: How Long Does Mortgage Foreclosure Take?
After the notice of default arrives after 90 days past due, the time it takes to complete the foreclosure will vary by state. In some states, it can be a matter of months. In others, much longer.
In jurisdictions where each step of the process requires court approval (judicial foreclosures), court backlogs can delay foreclosure for years.
Why Do Foreclosures Happen?
Foreclosure occurs in a number of situations. Some of the most common:
• Being underwater. When a homeowner has negative equity in the home, the property is more likely to be foreclosed on. Having an underwater mortgage is the most common reason for foreclosure.
• Rising interest rates. When a borrower’s loan has an adjustable interest rate, a sudden rise in the amount owed each month can lead down the path to foreclosure. With the 5/1 ARM, the interest rate is fixed for the first five years and then adjusts once a year.
• Mortgage types. Sometimes even the different kinds of mortgages can contribute to default. With an interest-only mortgage, for instance, after five or 10 years of interest payments, principal and interest kick in, resulting in higher payments.
• Personal situations. When the payment on a mortgage loan becomes too much or when a life event (hospitalization, death, divorce, layoff) prevents homeowners from making monthly payments, they can slip into default and eventually foreclosure.
If the homeowner doesn’t work with the lender to make a plan for repayment of the missed payments, the mortgage servicer can seek foreclosure.
Can You Avoid Foreclosure?
Homeowners have options if they’re facing foreclosure, and the sooner they contact their mortgage lender or servicer, the more they will have. Some of these include:
• Reinstatement. If you’re able to pay off the past due amounts and any penalty fees, the lender will stop the foreclosure process.
• Repayment plan. A repayment plan allows you to tack on a portion of your past-due payments to your regular payment each month. This makes sense if you’ve only missed a small number of payments and will no longer have trouble making a monthly mortgage payment.
• Forbearance. If you qualify for mortgage forbearance, your lender might pause or lower payments for a short amount of time. When you start making payments again, you’ll add portions of your missed payments to your regular payment to catch up.
• Loan modification. With a loan modification, the lender permanently alters the terms of the mortgage contract, so the payment is more manageable. This can include a reduced interest rate, adding missed payments to the loan balance, extending the term of the mortgage, or even canceling part of the mortgage debt.
• Filing for bankruptcy. Filing for Chapter 13 bankruptcy may allow you to keep certain assets like a house or car. A court must approve your repayment plan. It stays on your credit report for seven years. You might want to consult with a bankruptcy attorney if you’re thinking about going this route.
• Selling your home. If you have enough equity in your home to pay off the mortgage and pay for the cost of selling your home, you may be able to sell your home to avoid foreclosure.
• Deed in lieu of foreclosure. A deed in lieu of foreclosure is essentially when you hand over the title of your home to the lender instead of going through a foreclosure. It is less damaging to your credit than a foreclosure.
• Short sale. If the lender agrees to a short sale, it is agreeing to allow the home to be sold for less than what is owed. The deficit is taxable if the mortgage terms hold the borrower liable for the full amount of the loan.
Recommended: A Guide to Mortgage Relief Programs
Consequences of Foreclosure
Foreclosure has a huge impact on your credit. It will stay on your credit report for seven years after the first missed payment, and the multiple delinquent payments are a further knock against your credit scores, making it hard to go shopping for another mortgage and other loans.
After a foreclosure, it could take two to seven years to get a new conventional or government-backed mortgage.
But there are ways to deal with financial hardship.
Facing mortgage foreclosure is one of the toughest things a homeowner can go through. As the financial landscape shifts, knowledge is power.
If you’re on solid financial footing, that’s a good spot to be in. Are you in that league and shopping for a mortgage? Take a look at SoFi’s menu of fixed-rate home mortgage loans.
Get started with mortgage pre-approval and find the home of your dreams sooner than you may have thought possible.
Can I stop the foreclosure process?
Possibly. The sooner you contact your mortgage servicer, the more options you will have.
How will foreclosure hurt my credit score?
The lender reports each missed payment, and the further behind a borrower gets, the more delinquent they become. The credit score lowers with each report. A foreclosure stays on a credit report for seven years, which makes it harder to apply for other credit lines and loans.
Am I supposed to pay property taxes when my house is in foreclosure?
It’s true that a missed tax payment can also lead to foreclosure proceedings, but it depends on where you are in the process. If you’re working with your lender to get your missed payments back on track to avoid foreclosure, then your escrow account will be replenished and the mortgage servicer will pay your taxes. If you’re in foreclosure and not able to get your payments back on track, paying your taxes won’t help you get your house back. You’re better off working with your lender to put that money toward missed mortgage payments.
Do I have to move out of my house when it is in foreclosure?
The Federal Trade Commission advises staying in the house as long as possible if you’re facing foreclosure. You may not qualify for certain types of assistance if you move out.
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