What is a Foreclosure?
Foreclosure is a legal process that lenders and mortgage holders use to recover what a borrower owns on a defaulted loan. State laws and individual mortgage contracts dictate how many missed payments trigger a default. Once a default occurs, the lender can begin the process of foreclosure.
How foreclosure proceeds, what the lenders are allowed to do, and the timeline depends largely on state laws. However, in most cases, the lender does try to work with the homeowner to avoid foreclosure and recoup losses.
What Laws Govern Foreclosures?
Foreclosures are largely covered by state laws and even some local laws. State laws determine the procedures for a foreclosure, whether or not you can redeem your house after a sale, how you can reinstate your loan, and if you can be given a deficiency judgment. The latter occurs when the mortgage holder sells the house for less than the outstanding debt, and you owe the deficiency.
A few federal laws also impact foreclosures and how they proceed:
- The Soldier and Sailors Relief Act. This law from 1940 allows active service members to stay a default and foreclosure. This usually lasts until the end of active service.
- Bankruptcy Law. If the borrower files for bankruptcy, this puts a hold on foreclosure proceedings.
- Dodd-Frank Act. This law, passed in the wake of the 2008 financial crisis, included regulations to help homeowners avoid foreclosure. For instance, lenders must make an effort in good faith to contact and notify the borrower before beginning foreclosure.
What Are the Steps in a Foreclosure?
There are two types of foreclosure processes depending on the laws in the state where it occurs. In 22 states, you must go through the courts. This is known as a judicial foreclosure. In the other 28 states, non-judicial foreclosure applies, which is faster. It is also known as power of sale.
Whether you are subjected to a judicial foreclosure or power of sale, you’ll go through roughly the same process and steps:
- Missed payments
There is no foreclosure without default. If you pay on time, foreclosure should never occur. When you miss a payment, your lender will send missed payment notices, late fees, and ultimately a demand letter. At this point, you have 30 days to pay what you owe.
The lender will issue a notice of default after 90 days of non-payment. In some states, they can put a notice on your home. The notice also goes to the lender’s foreclosure department. You may have a 90-day reinstatement period following the notice so that you can make up the owed payments. In a judicial state, you will receive a court summons.
- Notice of Sale
If you cannot reinstate your loan, the lender will make public notice of the sale of your home. The sale is usually published in a local paper and recorded in the appropriate county.
In some states, the county sheriff’s office holds an auction to sell foreclosed homes. In others, the lender sells the home through the usual process. If a home is not sold during an auction, the lender owns the home and may sell it.
If you have not yet left the home, you may be evicted immediately after the sale. You will receive a notice to vacate and may be given a few days to leave.
What Are My Rights in a Foreclosure?
The foreclosure process is guided by state laws (and some federal laws) and provides certain homeowner rights. Know your rights so that your lender does not take advantage. If they make a mistake or violate your rights, you may be able to avoid foreclosure.
- Loss mitigation. The lender or mortgage holder must make reasonable efforts to notify you of default, help mitigate losses, and work with you to avoid foreclosure. They must notify you within 36 days of payments and within 45 days of loss mitigation options. They cannot start the foreclosure process until you have been 120 days late on payments. Some states also give you the right to remediation options.
- Breach letter. Most mortgage contracts contain a requirement to send a breach letter. This is a notification that you are in default on the loan and includes information about the default, what you can do to reinstate the loan, and the timeline.
- Foreclosure notice. In all states, you have a right to receive notice of a pending foreclosure. If you are in a state with a judicial process, you will get a summons. In states with non-judicial foreclosures, you will get a notice of default and then a notice of sale. The latter can be published rather than sent to you.
- Reinstatement and redemption. Many states require that a lender allow you to reinstate the loan if you repay everything that is past due in a lump sum. Even if you are not in a state that requires this, your contract may include reinstatement. All states allow you to redeem the property before its sale if you can pay off the debt owed.
- Challenge. In every state, you have the right to challenge a foreclosure legally. In a state with a judicial process, you can challenge it as part of the court process. In other states, you can file a lawsuit.
- Surplus. If your home goes through foreclosure and the mortgage holder sells it for more than what you owed, you have a right to the surplus. The cost must cover liens, fees, and other expenses before there is a surplus.
How to Avoid Foreclosure
The best way to avoid foreclosure on your home is to keep up with payments. During difficult financial times, this isn’t always possible. If you can’t make a payment, contact your lender immediately. They are often willing to work with homeowners.
Watch out for foreclosure scams, but do talk to a government-approved housing counselor. They can give you valuable advice and resources for avoiding foreclosure. Know your rights and the law. You have options to get out of foreclosure. A lawyer specializing in foreclosures is a good ally during this time.
Foreclosure is a bad situation for everyone, including the lender. The law allows for ways to remediate and reinstate defaulted loans, so work with a lawyer to find out what your options are.