Foreclosure: What it means and how to avoid it

If someone owns a home with a mortgage loan and doesn’t make their regular payments as agreed, they may find themselves at risk of foreclosure. Lenders typically use foreclosure as a last resort after a series of missed payments, so it shouldn’t be a surprise. Nonetheless, nobody wants to lose their home, see long-lasting damage to their credit score, or deal with any added costs of mortgage default. Taxing authorities, home owners associations, and others lienholders may be able to foreclose on a property

Fortunately, even after receiving a notice of default, homeowners have options like forbearance, refinancing, and payment plans to keep their homes and thrive with their finances. Here’s a closer look at what foreclosure is, how it works, and how you can navigate the process if you wind up in foreclosure.

What is a foreclosure?

Let’s start with a foreclosure definition. Foreclosure is a process mortgage lenders follow when a homeowner fails to make their mortgage payments. When a home is foreclosed on, a lender can repossess the property and sell it to recover their loss.

Mortgage loans are secured by real estate. Because the home serves as collateral for the loan, a lender can legally repossess the property when a borrower fails to repay the loan.

What is the process of foreclosure?

While the process may vary from state to state, homeowners typically go through several common steps if faced with foreclosure.

1. The lender notifies the borrower about the delinquency and foreclosure risk. This marks the beginning of the preforeclosure process, but the borrower still has time and options to avoid losing their home.
2. The borrower and lender can work together to find relief options. That could include forbearance or a payment plan, among other potential paths forward.
3. If the borrower doesn’t come up with a suitable arrangement, the lender can move forward with foreclosure, which may involve court filings in some states.
4. Once the foreclosure process proceeds, the lender can legally take possession of the property and sell it to repay the remaining loan balance.
5. The borrower must vacate the property, which is now wholly managed by the lender. A foreclosure is added to the borrower’s credit report.

Let’s take a closer look at the steps of the foreclosure process, examining how each can vary by state.

Early intervention

A single late or missed payment generally isn’t enough to trigger a foreclosure. Before a lender can proceed with foreclosure, the loan must be delinquent for at least 120 days, with some exceptions. Lenders and loan servicers are required to make good faith efforts to contact a borrower about missed payments and foreclosure alternatives. A borrower can even take advantage of a few options to avoid losing their home, even after a lender initiates the process.

If there is no resolution, the lender usually initiates foreclosure once the borrower has missed at least four payments. At that point, the loan is referred to a foreclosure counsel, and the borrower may get a notice of default.

Judicial foreclosures vs. nonjudicial foreclosures

There are two types of foreclosures in terms of legal proceedings. Judicial foreclosure requires going through a court and working with a judge, while nonjudicial foreclosure allows the lender to sell the house without judicial approval.

Judicial foreclosures are usually more time-consuming and costly than nonjudicial foreclosures. While all 50 states permit judicial foreclosures, only a subset of states require them.

Judicial foreclosure requires a lender to file a lawsuit in court. The borrower then typically receives up to 30 days to respond to the lawsuit. If they don’t respond, the court may rule in favor of the lender, and the house can be foreclosed and sold.

If the borrower chooses, the case will be heard by a judge to determine whether a settlement can be reached or the lender can proceed with foreclosure.

Nonjudicial foreclosure typically occurs when a mortgage has a power of sale clause or the promissory note is tied to a deed of trust. If a borrower defaults on a mortgage with a power-of-sale clause, the lender doesn’t need to go to court. They can auction off the home after the warning and waiting period outlined in the state’s laws. In the case of a deed of trust, the trustee, usually a title company, can seize a property and sell it without a court order.

Home sale and eviction

If a homeowner can’t bring their loan current, eviction will likely be the next step in a foreclosure proceeding. Homeowners may receive a notice from the lender, often referred to as a notice to quit, instructing them to vacate the property. Contact methods can vary by state. A letter or warning typically includes the timeline residents have to vacate the property, usually 3 – 30 days.

Lenders may sue if residents remain in the home, which can delay proceedings and potentially incur additional costs.

Foreclosure on your credit report

A foreclosure is an adverse event on your credit report that typically remains for 7 years from your first missed mortgage payment. A foreclosure damages your credit score, but the result varies and depends on many factors from your credit history.

A lower credit score and a newly listed foreclosure can hurt your ability to buy or rent a home, qualify for future credit, or even get a job. Many lenders won’t consider an applicant with a foreclosure on their credit report. However, some lenders may be more forgiving, particularly if the foreclosure occurred years ago and the applicant has handled their credit responsibly in the time since.

How can I avoid foreclosure?

Don’t panic if you receive a notice of default. You still have a few options to keep your home and get back on track. Let’s explore a few ways to avoid foreclosure.

Ask for mortgage reinstatement

Borrowers also can request mortgage reinstatement. It’s the quickest way to catch up on missed mortgage payments if it’s something you’re able to afford.

With mortgage reinstatement, you make a lump-sum payment that includes missed payments, interest, and fees to bring your loan up to date. Then you resume your regular mortgage payments.

Apply for refinancing

You can’t refinance your mortgage once the foreclosure process has begun. But if you haven’t reached that point and haven’t missed any payments, refinancing to a more affordable monthly mortgage payment may help you avoid defaulting and keep you in your home.

If you’re experiencing financial difficulties, contact your loan servicer or lender to discuss foreclosure prevention before you miss a mortgage payment. Refinancing to a longer payback period or a loan with a lower interest rate can significantly lower your monthly payment.

Ask for forbearance

With forbearance, homeowners can temporarily pause or lower mortgage payments, giving them breathing room to recover. Whether that’s finding a new job or decreasing debt, it’s time to get back on schedule with mortgage payments without foreclosure.

Forbearance doesn’t erase the debt, though. You will need to make arrangements with your lender, such as a repayment plan, loan modification, deferral, or partial claim, when forbearance ends. You should plan on interest continuing to accrue during forbearance, which can increase the total cost of your loan.

Arrange a repayment plan

A borrower may be able to qualify for a repayment plan to help avoid losing their home. Borrowers typically pay a portion of their past-due amount with their monthly mortgage payment until the overdue balance is paid. Once the mortgage is current, a borrower returns to making their original mortgage payments.

This is arguably the best option if the borrower can afford payments and the financial issue is resolved. As a bonus, if you’re already in the habit of making larger payments, you can continue those larger payments and get ahead on your mortgage, potentially saving you interest costs and putting you on a path to pay off your home early.

Apply for a short sale

A short sale happens when someone sells their home for less than the amount owed on the mortgage. The lender must approve a short sale and will receive the sale proceeds. To get approved for a short sale, a borrower must demonstrate financial hardship, and the home must be worth less than the borrower’s outstanding mortgage balance.

A short sale may not rank high on the list of preferred options for homeowners because it leaves them without a home or proceeds from its sale, but it can release them from debt. While a borrower can avoid having a foreclosure on their credit history, a short sale is still reported and negatively impacts their credit score.

Sign a deed in lieu of foreclosure

If you can’t catch up on your mortgage payments or don’t qualify for any options to prevent foreclosure, you may want to consider signing a deed in lieu of foreclosure, where you can hand over the property to the lender voluntarily. You won’t be able to keep your home after transferring the deed to your lender, but you’ll avoid some repercussions of foreclosure.

When you turn over the deed, your lender releases you from your remaining mortgage debt, and your payments end. While the impact on your credit history and score can be less severe, a deed in lieu of foreclosure will negatively impact your credit for several years.

The home can’t be in poor condition or have other liens or tax judgments. Otherwise, a lender may reject the arrangement, believing their chances of financial recovery would be greater through foreclosure.

Beware of foreclosure scams

Before paying someone who contacts you about a pending foreclosure, confirm that they’re legit. Mortgage scams are common, and anyone dealing with foreclosure should be alert to potential foreclosure scams.

Here are some concerning signs to watch for when working with a company or individual on a foreclosure:

• They “guarantee” they can stop the foreclosure or get you a loan modification.
• They urge you to stop talking to or paying your mortgage company and pay them directly.
• They pressure you to sign over your deed or sign paperwork you don’t understand.
• They claim to offer official or government-approved loan modifications.
• They request confidential information, such as your Social Security number or mortgage loan number, to “verify” your account.
• They recommend an expensive loan audit to identify possible lender violations.
• They claim to be an attorney and guarantee they can stop the foreclosure.

Never hand over money or sensitive information unless you can confirm the legitimacy of the person you’re speaking to and their claims. If someone claims to be a lawyer, confirm it by searching your state’s bar association member list and verifying whether they’re in good standing. Whether you’re working with a foreclosure attorney, consultant, or counselor, research each professional’s background thoroughly.

Your lender or loan servicer would prefer to keep you in your home rather than go through the time and expense of foreclosure. They can also help you explore strategies to avoid foreclosure, and it’s free of charge.

FTC guidelines for third-party foreclosure assistance

According to the Federal Trade Commission, a company can’t charge a client until they’ve received a loan modification offer and letter from their lender outlining the proposed changes to the mortgage. Legitimate foreclosure assistance programs clearly share all service charges before you receive a bill.

How to report a scam

If you think you’ve experienced foreclosure fraud, you can report it. To avoid a scam before it happens, learn more at the U.S. Department of Housing and Urban Development (HUD) scam prevention page.

After fraud takes place, you can:

• Call (888) 995-HOPE or visit the 995HOPE website.
• Contact your state’s attorney general office.
• Submit a complaint with the Consumer Financial Protection Bureau or Federal Trade Commission, or both.
• Enter a complaint on the company’s page with the Better Business Bureau.

FAQ

What is the 120-day rule for foreclosure?

The 120-day rule is a common state law that requires mortgage companies to wait until the borrower is 120 days delinquent before beginning the foreclosure process. This period gives the borrower time to resolve their financial situation and avoid losing their home.

What should I do if I receive a notice of default?

If you receive a notice of default, it’s a sign that you’re late with mortgage payments and could face foreclosure if you don’t act quickly to get your mortgage back into good standing.

If you’re struggling to keep up with your mortgage payments, contact your lender immediately and inform them of the situation. Lenders are motivated to work closely with borrowers to help them stay in their homes. Foreclosure is an expensive process for both parties, and foreclosed properties sometimes sell for less than it would take to satisfy the lender’s loss on the loan. If you receive a notice of default, talk to your servicer or lender as soon as possible to discuss your options.

Where can I find help if I’m facing a foreclosure proceeding?

Begin by exploring all available mortgage relief options. For instance, Rocket Mortgage® offers mortgage relief assistance to Rocket Mortgage borrowers. Borrowers can sign in to their account and learn about our mortgage relief options.

You can also visit the U.S. Department of Housing and Urban Development (HUD) website to explore government-approved resources and counseling services. Some states also have homeowner assistance funds that can offer financial help to avoid foreclosure.

Do you still owe money if the house is foreclosed?

Once foreclosure is complete, borrowers typically are not liable for any remaining mortgage balance. However, other types of loans, including home equity loans, may still exist. If you have multiple secured loans, you likely have to work with each lender individually.

Can you recover from a foreclosure?

While foreclosure is a difficult process, it’s not the end of the road for your finances. Many people go on to financially recover from a foreclosure and thrive. Paying bills on time, keeping your credit card balances low, and resolving errors on your credit report can prepare you for financial recovery and improved credit. Eventually, you may even qualify for a new mortgage to buy a new home.

The bottom line: Work with your lender to keep your home

No one wants to lose their home to foreclosure. Fortunately, homeowners have many options to turn the situation around and keep their homes, including temporarily pausing payments or refinancing. If you suspect you may miss a payment, contact your lender immediately to see what help they can offer. Lenders and borrowers benefit from avoiding foreclosure, so don’t hesitate to reach out. Early and constant communication is key.

Protect your home by staying ahead of financial difficulties. With a consistent, on-time mortgage payment history, you can check out refinancing options to lower your monthly payments.