What Is A Foreclosure And How Can You Stop It?

Nobody likes the thought of foreclosure, not even lenders. However, understanding how foreclosure works and the ways you can stop it – even toward the end of the process! – can work to your advantage.

It's a common misconception that foreclosure begins the minute you can't make your mortgage payments. Instead, lenders use foreclosure as a very last resort.

We'll help you iron out the foreclosure definition, details of the process (including the timeline of events) and address some frequently asked questions about foreclosure. 

A foreclosure happens when a borrower can no longer make their mortgage payments. Their lender uses the lien on the house to repossess the property and evict the former homeowners. A house listed as foreclosed means that the mortgage lender currently owns the home and is trying to sell it on the open market or through an auction.

Foreclosure can also happen when the homeowner fails to pay their property taxes or homeowners association fees.

What gives the lender the right to foreclose on the house? The home itself serves as collateral for the loan through the lien, which is a legal claim against property that can be used as collateral to repay debt. This gives the lien holder (your lender) the ability to foreclose on your home.

The foreclosure process is lengthy and the exact time frame depends on the state where the foreclosure takes place. It can take anywhere from a few months to several years, depending on the circumstances and state and local laws. ​​

Between the first public notice of foreclosure and the end of foreclosure, the average foreclosure took 922 days in the second quarter of 2021, according to a U.S. Foreclosure Market Report from ATTOM Data Solutions. This figure was down slightly from 930 days in the previous quarter of 2021 but up from 685 days in the second quarter of 2020.

There are four main parts of a foreclosure: Missed payments, notice of default, preforeclosure and foreclosure auction. Let's walk through each part of the process.

Missed Payments

The foreclosure process begins when you start to miss payments. If you know you'll have trouble making your mortgage payments, contact your lender immediately to learn about your options and take advantage of any assistance your lender can offer. Late fees start within 10 – 15 days of missed payments.

Your lender may work with you to prevent a foreclosure using a few different methods. Here are the most common ones:

• Reinstatement: Mortgage reinstatement means restoring your mortgage after a mortgage default by paying the total amount past due.
• Loan modification: A loan modification alters the terms of a mortgage to help you avoid foreclosure.
• Short refinance: A short refinance refers to a mortgage refinance by a lender when you're in default on your mortgage payments.
• Short sale: A short sale occurs when you sell your home for less than what you owe on the mortgage for the purpose of avoiding foreclosure. Depending on the details worked out in the short sale, you may still be responsible for paying the difference between the short sale price and the balance of the mortgage owed.
• Forbearance: Forbearance is the temporary postponement of mortgage payments.
• Foreclosure avoidance programs: Some government foreclosure avoidance programs exist through the Department of Housing and Development. Learn more about avoiding foreclosure through HUD.

Foreclosure laws and processes vary by state, so familiarize yourself with the specific rules and regulations for your state.

Notice Of Default

After 30 days of missing payments, you are in default and the foreclosure processes pick up.

If you try working with your lender and you still can't make your payments, your lender will initiate the foreclosure process by notifying you that legal action is beginning. This occurs within 3 – 6 months of the first missed payment and is called a "notice of default" or a "lis pendens." If you ignore your lender's attempts to contact you, the foreclosure process will start earlier.

Depending on where you live, the lender may have to record a public notice that you have defaulted on your loan, usually with the county recorder. Once the lender files this notice, the preforeclosure period has begun.

Preforeclosure

Preforeclosure, commonly referred to as a grace period, varies in length from 30 – 120 days. It’s harder to reverse the foreclosure process at this point as fewer options are available to you. 

Check the specific rules for your state to find out how much time you have during this part of the process to get back on track.

Foreclosure Auction

If you have entered this phase, the primary focus goes from trying to keep the home to trying to get the most value for it – for both you and your lender. You still have the Right of Redemption at this point, which means if you pay off the amount owed, you get to keep your house.

The mortgage company will try to get as much owed to them as possible through a foreclosure auction, a public auction that sells your home after finishing up the foreclosure process. If there is any money left after that process, it goes to you, the borrower. Many states require these auctions to take place in publicly accessible spaces and often occur in front of or inside county courthouses.

Learn more about the foreclosure process by reading through the following common questions homeowners frequently ask.

Are there ways to stop a foreclosure?

Though it can feel like a scary process, there are several ways of avoiding foreclosure and you can find hope at many intervals throughout the process. To stop a foreclosure outright and keep your home, you’ll need to pay what is owed. The most important thing you can do is talk to your lender or loan officer if you are worried about not making your mortgage payments on time. Keep the lines of communication with your lender open, be honest about what you can pay and you may come up with a mutual solution.

Is it easier to use a short sale to avoid a foreclosure?

It is possible to use a short sale to avoid a foreclosure, but the ability to do so depends on the lender’s approval. Most lenders won’t give full approval without an offer from a potential buyer to buy the foreclosed home. The short sale process takes longer than other types of home sales and buyers often back out of the contract if they find a different home.

Here's how this process can work: Let's say you owe $100,000 on your mortgage. You know of someone else who wants the home, who will buy it for $75,000. The new buyer pays the lender $75,000. In this case, you still have to pay the difference between the short sale price and the balance of the mortgage owed – $25,000.

What is a deed in lieu of foreclosure?

A deed in lieu of foreclosure means you and your lender reach a mutual understanding that you cannot make your loan payments. The lender agrees to avoid going through the foreclosure process as long as you hand over the property deed. In exchange, the lender releases you from your obligations under the mortgage. Another major benefit to a deed in lieu of foreclosure is that it allows you to avoid a foreclosure on your credit report.

What happens to the borrower after a foreclosure?

A foreclosure can affect your credit score and your ability to purchase another home. It stays on your credit report for 7 years from the date of your delinquency.

You can recover, however. It's still possible to purchase a home after foreclosure or bankruptcy. How fast you do so depends on a few factors, including the type of bankruptcy you undergo and the mortgage investor associated with your loan. When you want to purchase a new home after foreclosure, shop around among mortgage lenders, because each one has its own requirements.

Note that you may still owe money after a foreclosure. If your lender can’t sell the home for enough money to cover everything you owe, a court might file something called a deficiency judgment against you. This means you must pay the difference between the amount you owe on your mortgage and what your lender earned when selling your home through foreclosure.

In a traditional (non-bankruptcy) foreclosure, the lender takes possession of your home and sells it. A foreclosure has four main steps: missed payments, notice of default, preforeclosure and foreclosure action.

If you’re behind on your mortgage payments with no hope of catching up, the foreclosure process isn’t your only option. It’s in the best interest of both you and your lender to avoid foreclosure, so work with your lender to determine a solution. You can either communicate with your lender before you default on your mortgage or reach out to a real estate attorney.

Ready to learn more about buying a home, even if you have a foreclosure in your history? Find a real estate agent for additional assistance and advice on the current market.