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.
What Is The Process Of Foreclosure?
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.
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.
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. Source
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