Foreclosure Defined: What It Is, How To Avoid It And What It Means For You

No homeowner ever wants to think about losing their home to foreclosure. Whether you’re looking for a formal definition of foreclosure because you may be facing the possibility or are preparing to purchase a , you can use the information in our guide to understand the foreclosure process – and more importantly, avoid it.

Foreclosure is a process that’s triggered when a homeowner fails to make their mortgage payments. When a home is foreclosed on, a lender typically repossesses the property and attempts to 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 make their monthly mortgage payments.

While the foreclosure process may differ slightly from state to state, homeowners will likely experience common steps.

A lender contacts a homeowner to inform them of their delinquency and notify them about the possibility of foreclosure. The lender and homeowner explore options to keep the loan current. If the homeowner can’t bring their mortgage up to date, the lender may proceed with foreclosure. Depending on your state’s laws, your lender may file with a court to initiate foreclosure.

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

Early Intervention

Before a lender can proceed with foreclosure, the loan must be at least 120 days delinquent (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.

Foreclosure Counsel And Notice Of Default

Servicers or lenders referring a loan to foreclosure counsel is the first step in the foreclosure process. Depending on state laws, an attorney will initiate the process by filing a complaint or notice of mortgage default. Defaulting means a borrower has failed to repay a loan according to a lender’s terms.

Even after the first legal action, borrowers can apply for loss mitigation and look into options to avoid losing their homes.

Judicial Foreclosures Vs. Nonjudicial Foreclosures

There are two types of foreclosures: judicial foreclosure and nonjudicial foreclosure.

Judicial foreclosures are usually more time-consuming than nonjudicial foreclosures. While all 50 states allow judicial foreclosures, some states require it. Judicial foreclosure requires a lender to file a lawsuit in court. The borrower receives up to 30 days to respond to the lawsuit. If they don’t respond, the court may rule for the lender, and the house can be foreclosed and sold. If they respond and go to court, the case will go before a judge to decide whether a settlement can be reached or the lender can foreclose.

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.

Judicial Foreclosure States

Judicial foreclosure is available in all states. However, these 25 states primarily use it:

• Connecticut
• Delaware
• Florida
• Hawaii
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Nebraska
• New Jersey
• New Mexico
• New York
• North Dakota
• Ohio
• Oklahoma (if the homeowner asks)
• Pennsylvania
• South Carolina
• South Dakota (if the homeowner asks)
• Vermont
• Virginia
• Washington, D.C. ()
• Wisconsin

Nonjudicial Foreclosure States

The following states allow foreclosures without court involvement:

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Colorado
• Georgia
• Hawaii (judicial foreclosure is also typical)
• Idaho
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• New Hampshire
• New Mexico (sometimes)
• North Carolina
• Oklahoma (unless the homeowner asks for a judicial foreclosure)
• Oregon
• Rhode Island
• South Dakota (unless the homeowner asks for a judicial foreclosure)
• Tennessee
• Texas
• Utah
• Virginia
• Washington
• Washington, D.C. (sometimes)
• West Virginia
• Wyoming

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 to quit from the lender to leave the home. How lenders contact homeowners varies 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 ignore an eviction notice and stay in the home.

Foreclosure Added To Credit Report

A foreclosure is an adverse event that stays on your credit report 7 years from your first missed mortgage payment. Your existing credit history will significantly impact how foreclosure affects your credit score.

The hit your credit takes from a foreclosure can hurt your ability to purchase or rent a home. Many lenders won’t consider an applicant with a foreclosure on their credit report, but some lenders may be more forgiving, especially if the foreclosure happened years ago.

Don’t panic if you receive a notice of default – you still have a few options to protect your home from foreclosure. Let’s explore a few ways to avoid foreclosure.

Ask For Forbearance

With forbearance, homeowners can temporarily pause or lower mortgage payments, giving them the breathing room they need to rebuild their savings, increase their income or decrease debt to help get back on track with their mortgage payments.

However, forbearance doesn’t erase debt. You may need to make arrangements with your lender, like a repayment plan, loan modification, deferral, partial claims, etc., when forbearance ends.

Apply For Refinance

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.

Arrange A Repayment Plan

A lender may agree to put a borrower on a repayment plan to help them avoid losing their home. Borrowers typically pay a portion of their past-due amount with their monthly mortgage payment until the overdue balance gets paid. Once the mortgage is current, a borrower returns to making their original mortgage payments.

Ask For Mortgage Reinstatement

Borrowers can also request mortgage reinstatement. It’s the quickest way to catch up on missed mortgage payments.

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

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, consider signing a deed in lieu of foreclosure. 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. 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.

You have to walk away from the home under this arrangement, but it allows you to avoid many downsides of the foreclosure process.

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.

Apply For A Short Sale

A short sale is when you sell your home for less than you owe on the mortgage. The lender must approve the short sale and 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 will avoid having a foreclosure on their credit history, a short sale will damage their credit score.

Before paying money to a company or individual that contacts you about a pending foreclosure, confirm that they’re legit. The Consumer Financial Protection Bureau offers resources to help homeowners flag 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 money directly to them.
• 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 forensic 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 until 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 list and verifying whether they’re in good standing. Whether you’re working with a foreclosure attorney, consultant or counselor, research everyone’s professional background.

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. And all service charges must be clearly outlined before you receive a bill.

How To Report A Scam

If you think you’ve experienced foreclosure fraud, here’s how you can report it:

• Call (888) 995-HOPE or visit the 995HOPE website
• Visit the Federal Trade Commission website, contact your state’s attorney general office or the Better Business Bureau
• Visit the U.S. Department of Housing and Urban Development (HUD) scam prevention page
• Submit a complaint on the Consumer Financial Protection Bureau site

Let’s explore more common questions about the foreclosure process.

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

If you’re struggling to keep up with mortgage payments, contact your lender immediately and tell them what’s happening. Lenders are motivated to work with borrowers and do everything they can to help them stay in their homes. Foreclosure is an expensive process, and foreclosed properties often sell for much 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 to discuss your options.

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

Start by exploring all 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.

No one wants to lose their home to foreclosure. Fortunately, homeowners have many options to explore to turn the situation around and keep their homes. 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.