If you fall behind on several mortgage payments, your lender may begin the foreclosure process, which can lead to months of financial and emotional stress, and even result in the loss of your home.
If you start falling behind on your payments, or stop making your mortgage payments completely, the bank or lender can foreclose on the property and sell it as a way to make back the funds that were lost.
How does foreclosure work?
When you purchased your home, you signed a mortgage contract that specified the amount of money you borrowed, as well as the interest rate and the details about your monthly payment.
However, simply living in your home does not mean that you legally own it. If you have a mortgage, the bank or lender technically owns the property until you make your final mortgage payment.
Types of foreclosure
After you have several missed mortgage payments, your lender can start the foreclosure process. There are two main ways your home can be foreclosed on:
A judicial foreclosure, meaning the lender needs to get a court order.
A nonjudicial foreclosure, depending on the state where the property is located.
There are several different types of foreclosures, depending on the state and the terms of your mortgage. Some foreclosures involve legal action and others do not. The types of foreclosures include:
Judicial foreclosure: With a judicial foreclosure, the lender files a lawsuit and the borrower is notified of the non-payment. The homeowner has 30 days to make up the missed payments, otherwise the foreclosure process will proceed.
Power of sale: A power of sale foreclosure is allowed in some states if your mortgage has a power of sale clause in the contract. Once the borrower falls behind on their payments, their mortgage provider is allowed to put the house up for auction. A power of sale foreclosure is considered a non-judicial foreclosure because there is no legal action taken.
Strict foreclosure: Strict foreclosures are less common because they are only allowed in a few states. In this case, the mortgage lender files a lawsuit against the homeowner, and if the borrower does not make up their payments within the court-ordered time period, the home can be seized by the mortgage holder.
How the foreclosure process varies by state
Each state has its own laws pertaining to the process of foreclosure and foreclosure sales. These can govern the borrower’s relief options if already in foreclosure, how to go about posting a Notice of Sale, the sale timeline and other parts of the process.
The foreclosure process in 5 steps
From the time of your first missed mortgage payment to the foreclosure sale of your home, there are several steps in the foreclosure process. These phases can vary by state, but generally follow this timeline.
Step 1: Missed mortgage payments
If your mortgage payment is a few days late, you are probably not at risk of foreclosure. Your lender may have a grace period of up to two weeks for you to make your payment without serious penalties. After the grace period, however, your payment is considered late and you’ll be charged late fees. You might also receive a warning from your lender about a potential foreclosure if you fail to make the payments.
Step 2: Notice of Default
After three to six months of missed mortgage payments, your lender will file a Notice of Default with the local recorder’s office. Your lender will also send one to you via certified mail, and depending on your state, might post the notice on your front door. This notice specifies how much you owe in order to bring your mortgage back into good standing.
A Notice of Default could show up on your credit report and affect your score. This can make it more challenging to obtain other types of credit or refinance your mortgage.
A Notice of Default doesn’t equate to the lender immediately or automatically foreclosing on your home, and it doesn’t mean you don’t have options to prevent the foreclosure from happening. You can put a stop to the preceedings by getting current on your payments.
Step 3: Preforeclosure
Preforeclosure is the time period between the Notice of Default and the auction or sale of your home. During this time, if you can get your hands on the amount specified in the Notice of Default, you’ll be able to stop the foreclosure process from going any further. The exact amount of time you have depends on your state. During preforeclosure, you might also have the option to sell your home and pay back the money owed, in what is called a short sale.
Step 4: Notice of Sale
If you don’t have the money to bring your mortgage into good standing within the allotted time frame, your lender will file a Notice of Sale, and your home will be placed up for auction at a specified time and location.
How the Notice of Sale is published depends on your state. For example, in North Carolina, the notice must be published in a local newspaper and posted on the door of the local courthouse, while in California, it must be posted on the property as well as a public place in the county.
Because the Notice of Sale is public information and has been advertised, several buyers, including investors, might be interested in buying your home. Depending on laws in your state, you might have the ability to exercise right of redemption (meaning you can reclaim your home) up until the foreclosure sale, or even after.
Step 5: Eviction
Following the auction and sale of your home, you’ll generally have a few days to gather your belongings and move to a new residence. If you do not voluntarily move out, law enforcement personnel are legally allowed to remove you and your belongings from the premises.
If you’re struggling to make your mortgage payments, your best bets to avoid foreclosure are time and communication. As soon as you realize you can’t pay your mortgage, reach out to your lender or servicer to learn about the options available to you. They might be able to set up a payment plan or allow you to defer the payment for one month if you have a temporary financial hardship.