Foreclosure is a word most homeowners hope to never hear, but can quickly become a reality after several missed mortgage payments. The good news is that foreclosure can be avoided, especially if you know what steps to take once your mortgage becomes unaffordable.
To help you understand foreclosure proceedings and what’s involved, I’ve created this simple guide. Keep reading to learn everything you need to know about what happens when a lender decides to foreclose on a home, plus tips on how you can avoid this unfortunate fate.
What is foreclosure?
Foreclosure is what happens when your home is seized back by a mortgage lender to use as collateral for any unpaid portion of a mortgage. Since mortgage loans are typically collateralized, this means that your property can be used as collateral in the event of missed payments, at any time after the initial signing of the loan agreement.
Although a mortgage lender seizing a home is the most common scenario people think of when imagining foreclosure proceedings, it’s also possible to lose your home for things like failing to pay property taxes or even racking up too many late fees or missed payments with your homeowner’s association (HOA).
While most people purchasing homes do so with every intention of paying their mortgages on time, big life changes can happen. You might lose your job or incur emergency-related expenses
. And all of these things may lead to being unable to pay your mortgage
and spell disaster for the security of your home.
How foreclosure works
Fortunately, foreclosure typically doesn’t happen after one missed payment. You’ll generally need to miss at least 3 months of mortgage payments before foreclosure comes into the picture. That’s because federal law dictates that loan servicers must wait for at least 120 days of a missed payment before starting the foreclosure process. Since 120 days amounts to nearly 4 months, this pre-foreclosure period gives borrowers some time to figure out any financial difficulties
before lenders start the process of eviction and ultimately foreclosing on their homes.
Mortgage states vs. deed of trusts states
The exact laws of foreclosure vary from state to state and primarily depend on whether your state is a mortgage state or a deed of trust state. In mortgage states, a mortgage document legally refers to the paperwork that gives the lender a lien over the property — in other words, a sort of legal IOU that provides the lender with a security interest over the property and ensures they receive payment for the debt.
In these scenarios, your lender would also be your lienholder, as you’ve created a debt with this lender using your home as collateral. Some mortgage states allow lenders to hold onto property titles (the document that grants official ownership) until the debt is paid, while others allow borrowers to keep the title even while repaying the loan.
In deed of trust states, lenders use a third party (also called the trustee) to hold onto the title of the property until the loan is paid. Depending on the laws of your state, the trustee might be an attorney or even a mortgage broker.
Why your state laws matter
Legal jargon aside, the biggest reason to understand what kind of state you live in is that it may change the way foreclosure proceedings happen, as well as affect your legal rights throughout the process. In mortgage states, a lender will generally need to wait a prescribed amount of time before filing a lawsuit that starts the foreclosure process. As you may imagine, this can take months or even years to happen.
In deed of trust states, the foreclosure process can begin (and the home can be put up for sale) as soon as the lender provides proof to the trustee that the borrower has defaulted on their loan. This is because of the “power of sale” clause that’s typically included in the mortgage document or deed of trust. While some states might observe both mortgage state and deed of trust state laws, it's good to understand the difference and know exactly which type of agreement you’ve entered into before signing anything.
Types of Foreclosure
In addition to the varying state laws that go into foreclosure proceedings, it’s also good to have a rough understanding of the corresponding types of foreclosure.
Judicial foreclosure is what happens when lenders in mortgage states start the legal process of foreclosure. This involves filing a civil lawsuit against the borrower and working with the court as well as the county recorder to finalize the sale of the home in the hopes of recouping losses from missed mortgage payments. Although the home sale generally covers all such expenses, borrowers can find themselves penalized with a deficiency judgment. This occurs when the sale of the home is insufficient to cover the debts owed to the lender, also called a short sale.
At some point in the proceedings of a judicial foreclosure, the court will file something called a notice of foreclosure sale, which lists the date and time, as well as the location of the home auction. This entire process generally takes around four to eight months and typically allows borrowers to stop the foreclosure at any time (also called right of redemption), given they’re able to pay back whatever they owe to their lender.
Non-judicial foreclosure is generally what occurs in deed of trust states. While this process can take anywhere up to a year to complete, it’s usually much faster as it doesn’t involve the court system and only allows borrowers a limited window of time to stop the foreclosure proceedings. This window of time is laid out in a document called a Notice of Default (NOD). Once this window expires, there’s nothing a borrower can do to stop the foreclosure, and the home will be similarly listed for sale as it is in judicial foreclosures.
The third type of foreclosure is called a deed-in-lieu, short for a deed-in-lieu of foreclosure. This happens when both borrower and lender reach some sort of agreement whereby the borrower agrees they cannot make payments and that they will hand over the property peacefully. Although this type of deal might not be possible in many situations, it’s ultimately a lot less complicated and may save time for both borrower and lender.
How to avoid foreclosure
Foreclosures are perplexing and painful events for any homeowner, but there are things you can do to avoid them. Here are a few ideas to consider if you’re having trouble making mortgage payments and are concerned it might lead to foreclosure.
Once you know you’re at risk of not being able to afford a monthly mortgage payment, you should contact your lender asap and find out what options you may have. Your lender might be able to provide you with a temporary grace period or loan forbearance to allow for repayment without penalty, or even discuss loan modification (ie. changing the terms of your loan) to make it more affordable.
If your current mortgage loan isn’t working for you, refinancing is another option. Rather than waiting until you’ve missed one or more mortgage payments, contact your lender (and other lenders) to see if you can refinance your home loan. You may qualify for a loan that’s more affordable and easier to pay each month, allowing you to continue making payments and stay on good terms with your lender and the credit unions.
Get outside help
Depending on the type of home loan you have, you may be able to contact certain organizations for help in the event of financial difficulty. For example, if you have an FHA loan
, there are assistance programs run by the U.S. Department of Housing and Urban Development (HUD) to help you overcome financial challenges and avoid foreclosure.
Tips for keeping up with mortgage payments
The best steps to take to avoid foreclosure are the ones that help you successfully make your mortgage payments each month. Here are some tips that can help you keep your head above water when it comes to paying down that mortgage.
Do the math before signing anything
This sounds obvious, but some people set themselves up for failure from the very beginning by signing up for a home loan from Freddie Mac or Fannie Mae that they actually can’t afford. One way to avoid this is by working with a real estate agent to crunch the numbers before finalizing your home loan. A real estate agent can help you understand exactly what expenses you’ll be expected to pay — including things like closing costs
and property taxes. That way, you can be sure the monthly payments are something you can truly afford.
Make a plan
Once you have a mortgage in place, you’ll want to come up with some sort of plan for paying it every month. This might mean setting aside a portion of your paycheck to afford it or even cutting down on other expenses. The trick here is to have a plan to repay your mortgage and be sure you’re making payments on time.
Set reminders or automatic payments
Making your monthly payments on time isn’t just about keeping your lender happy (although that’s also important). It’s also about maintaining a positive credit score, which is affected (among other things) by making payments on time. Once you have a mortgage lined up, be sure to set monthly reminders to pay it, or better yet — automatic payments.
Create a budget
If affording your monthly mortgage payments has become difficult (or even if you anticipate it will be), now’s the time to create a budget for yourself. Budgets come in all shapes and sizes, but the important thing is to find the one that works for you — which will be the one that sets you up for success and is easy to stick with.
The bottom line
Hopefully, you’ll never have to consider the ins and outs of foreclosure too deeply, but if you do, be sure to seek out help early on. Start by contacting your lender whenever you realize you won’t be able to make a mortgage payment. If they can’t offer you any relief, reach out to other lenders to find out about refinancing. Remember that you likely have options at your fingertips that won’t involve losing your home — and it’s worth figuring out just what they are before it becomes too late.