Foreclosure is the action a bank or mortgage lender takes against a homeowner if they breach the mortgage agreement and default on the loan. The lender seizes the property and auctions it to recoup its losses. A mortgage agreement, sometimes called a trust deed or deed of trust, is a legally binding contract, and foreclosure may involve a court process in some states.
How long does foreclosure take?
Most lenders will issue a foreclosure once you miss four mortgage payments — approximately 120 days after the first missed payment. But there are several steps prior to a lender ordering a foreclosure.
- In most cases, once you miss at least one payment, you have a 15-day grace period from the time your payment is due before you start incurring late fees. So, if your mortgage payment is due on the first of the month, you have until the 15th to pay before being considered late.
- If the payment is late for 30 days, the lender might send a delinquency notice informing you that you are behind on payments. Most creditors will also call you to discuss your situation and offer assistance. But keep in mind that at this point, they’ll also notify the main credit bureaus, which will lower your credit score.
- If you continue to miss payments, you’ll receive a demand letter or notice of default stating the total amount owed and a 30-day deadline to pay it in full. This is known as the pre-foreclosure period, and it typically starts once you’re 90 days late — that is, when you’ve missed three payments. Not paying the amount owed before the deadline stipulated in the demand letter would cause the official foreclosure process to start.
What happens next?
The foreclosure process varies from state to state. However, lenders will inform you of the next steps, such as when the property will be scheduled for auction and when the foreclosure is expected to finalize.
Additional steps depend on whether the foreclosure is judicial or non-judicial. Some states do not allow judicial foreclosures. Others (like California, Texas, Nevada and Arizona) allow both. In these states, the lender typically chooses the method most likely to result in their advantage.
However, note that neither a judicial nor non-judicial foreclosure can start until you're more than 120 days delinquent on payments.
Difference between judicial and non-judicial foreclosure
Judicial and non-judicial foreclosures offer protection to the lender, who can reclaim the property if payments are not sufficiently up to date. Both options also protect the borrower, who can purchase the property from the buyer for up to one year after the auction. This is known as the right of redemption, but it rarely happens.
Judicial and non-judicial foreclosure also allows the lender to sell the property for less than the amount owed. The lender can then sue the borrower for the difference.
In a judicial foreclosure, the lender files a lawsuit with the court, and a judge must approve the foreclosure before the lender schedules the property for auction. At the end of the foreclosure period, the lender must file a petition to proceed, and the judge will order an auction, unless they feel there is a reason not to, for example, if the borrower appeals their case, citing unfair lending practices.
Non-judicial foreclosure doesn’t involve the courts; it's still a legal process but is quicker and cheaper than a judicial foreclosure. Redemption rights vary by state. In some states, the borrower may not have the right of redemption at all. Lenders may sell the property at any price they decide. If the property sells for less than what the borrower owes, the lender may sue the borrower for the difference, a process known as a deficiency judgment.
How long can the borrower stay in their home after foreclosure?
The foreclosure process varies by state and can last anywhere from a few months to over a year. During that time, the borrower can stay in the home until it’s sold. After the auction, the new owner must notify the original owner of how long they can stay before eviction.
Again, the timing varies across states. In Florida, for example, the buyer must give the previous owner a 30-day' notice to vacate the premises, while in Ohio, it could be less than a week.
The consequences of foreclosure
Foreclosure is unfortunate, but it happens. It will remain on your credit report for seven years from the date of the first default. After seven years, it will no longer appear, but it will lower your credit score.
This consequence can make it harder to apply for credit cards, get approved for loans, and you will likely have to pay higher rates of interest. Additionally, you could run into housing issues, since many landlords check credit reports before entering rental agreements.
How can you avoid foreclosure?
Communicating with your lender is always the best course of action since most lenders are willing to cooperate with borrowers to avoid the costly, time-consuming foreclosure process.
Your lender may agree to a temporary forbearance if you're facing a temporary financial hardship due to job loss, illness or other circumstances. You could also ask for a short refinance, which can help lower your monthly payments.
Reinstatement is another option, but it involves paying all the accumulated late payments and additional fees in full.