What Is A Foreclosure And How Can You Stop It?

For homeowners, “foreclosure” is definitely a scary word — it conjures visions of forced evictions, moving boxes hastily piled on lawns and other frightening scenarios. But there are many ways to avoid foreclosure, which is typically a last resort for lenders — even banks don’t like the idea of foreclosing on a property.

This said, it’s critical to understand what foreclosure is and the ways you can prevent it as you navigate the complicated world of homeownership.

What Does Foreclosure Mean?

A foreclosure is essentially what happens when a borrower can no longer make their mortgage payments, or monthly fees that go toward the cost of the home. That’s when a lender uses the lien on the house to repossess the property — or foreclose — 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. Foreclosure laws and processes vary across the country, so familiarize yourself with the specific rules and regulations within your state.

A lender has the right to foreclose on a home because the property serves as collateral for the loan through the lien, a legal claim against property that can be used as collateral to repay debt. This gives the lien holder — the lender— the ability to foreclose on a home.

Types Of Foreclosure

There are three different types of foreclosure processes in the United States: judicial foreclosure, strict foreclosure and power of sale. There are some similarities among these various types — for instance, they all require public notices to be issued and all parties to be notified regarding the proceedings. And once the properties are sold through an auction, families have a brief amount of time to find a new place to live and move out before an eviction is issued.

Here are the details of each type of foreclosure:

• Judicial foreclosure: All states allow this type of foreclosure, and some require it. In this practice, the lender files a lawsuit and the borrower receives a mailed notice demanding payment; this typically occurs after the borrower has missed three consecutive mortgage payments. The borrower then has 30 days to respond with a payment and bring the loan current — if a payment is not made by a certain point, the mortgage property is then sold through an auction to the highest bidder. This last step is carried out by a local court or sheriff's office.
• Power of sale: In this instance, the lender sends out notices demanding compensation after a homeowner has defaulted on mortgage payments. Once an established period has passed, the mortgage company — rather than local courts or sheriff's office — sells the property at a public auction.
• Strict foreclosure: In strict foreclosure proceedings, the lender files a lawsuit against the homeowner who has defaulted. If the borrower is unable to fulfill the mortgage payment within a court-specified timeframe, ownership of the property reverts to the mortgage holder, without requiring a sale. Typically, strict foreclosures occur only when the outstanding debt surpasses the property's assessed value. Connecticut and Vermont are the only states that allow for this type of foreclosure proceeding.

How Does the Foreclosure Process Work?

As noted, the foreclosure process can vary dramatically from state to state. However, there are several steps within the process that are consistent across states.

Stage 1: Homeowner Misses One Or More Loan Payments

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

The foreclosure process is complicated for everyone, so lenders may be willing to work with you to prevent it from happening. Here are some of the more common methods they may employ:

• 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.
• A 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 Urban Development (HUD). Learn more about avoiding foreclosure through HUD here.

Stage 2: Lender Sends a Notice of Default

If you miss a mortgage payment by 30 days, you are officially in default of your mortgage agreement .

And if you are past this point 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 to 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 — typically with the county recorder — that you have defaulted on your loan. Once the lender files this notice, the pre-foreclosure period begins.

Stage 3: Property Enters Pre-foreclosure

Pre-foreclosure, commonly referred to as a grace period, varies from 30 to 120 days. It’s harder to reverse the foreclosure process after this point, so 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.

Stage 4: Lender Files a Notice of Sale

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 can pay off the amount owed, you still get to keep your house.

The mortgage company will try to maximize the property’s value through the home auction process, which is a public auction where they sell your home to the highest bidder. 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.

Stage 5: Homeowners Vacate the Residence

Once your right to stay in the dwelling ends, the new owner can initiate proceedings to evict you from the premises. Depending on your state’s laws and the specifics of your situation, the creditor may exercise the option of evicting you from the property as part of the foreclosure.

The method of alerting a borrower to the threat of eviction varies based on the state of residence. A letter or warning typically gives residents a period of time (usually between 3 and 30 days) when they have to vacate the premises.

If the residents do not leave and ignore an eviction notice, they can be sued. A lawsuit of this manner could severely hurt a borrower’s ability to rent or buy property again, so vacating is the best option.

Foreclosure FAQs

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.

How To Stop a Foreclosure: 5 Tips

1. Modify Your Loan Terms

If your mortgage proves to be too financially onerous, you might want to look into modifying the terms of your loan. Instead of replacing your original mortgage with a new one, a loan modification alters the conditions of your existing mortgage.

If you choose to modify your loan, your lender can change the terms and conditions in a few ways. One is reducing your interest rate if rates are lower than when you initially took out your mortgage. The lender can also extend your loan term, which is the length of your loan. For example, if your loan term is 15 years, the lender might be able to modify it to a 30-year mortgage.

Your lender also has the option to change the structure of your mortgage from an adjustable-rate mortgage to a fixed-rate mortgage. These alterations could free up money and help you make your mortgage payments.

2. Set Up a Loan Repayment Plan

A repayment plan takes the amount of the mortgage that is past due and splits that up over a few months in addition to your normal mortgage payment. You pay extra each month until the past due amount is satisfied.

This option is best for a short-term hardship when you expect that your finances will return to normal soon. You should also consider whether you’ll have money in the budget to pay this extra amount within each month of the repayment plan, as it does not change the existing terms of your mortgage.

3. Ask for a Mortgage Forbearance

A mortgage forbearance is the temporary postponement of mortgage payments, and it can be available upon request. To obtain one, you'll have to contact the company that receives your monthly mortgage payment. Qualifications for forbearance can vary, and the type of mortgage you have can also determine what options you're offered.

4. Obtain 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. This brings a major benefit in that it allows you to avoid a foreclosure on your credit report. However, you can still expect your score to be impacted as this is still considered a negative mark on your credit.  

5. Sell Your House in a Short Sale

In a short sale, a lender allows a borrower to sell their property for less than the amount they owe on the mortgage. This process gives the homeowner an opportunity to avoid the more negative consequences associated with foreclosure.

There are conditions that must be met, however; for starters, a lender will require proof of financial hardship before agreeing to a short sale.

How to Buy a Foreclosed House

Buying a foreclosed home can be an excellent opportunity, as you could end up with a beautiful home for an affordable price. But doing some also comes with risks that can be so off-putting that some buyers won’t even consider buying a foreclosed home.

If you want to proceed in this area, here are some helpful steps:

• Get preapproved: Getting a preapproval is a crucial first step to buying a house, and it’s likely that the same will go for buying a foreclosed property. Unless you plan to buy your home at a foreclosure auction or are interested in a property that stipulates a cash payment, you’ll most likely still need to get a mortgage to help finance your purchase.
• Work with a real estate agent: There can be a lot of unknowns when you try to buy a home that’s in foreclosure. Working with an experienced real estate agent can help you be prepared and go into the process with more confidence.
• Attend a property auction: If you’re looking for a speedier home buying process and are eager to close, then buying a home through a foreclosure auction might be the way to go. Here are a few things to keep in mind as you prepare to buy a foreclosed home at an auction:
• Check the title: Because an auction is different from the traditional home buying process, there’s typically no title. Instead, it’s on you to check the title for yourself.
• Prepare to make a cash deposit: In most cases, auctions require a cash deposit, meaning you’ll need a significant amount of money on hand.
• Prepare for home repairs: Properties sold at auctions are sold as-is and may be considered distressed properties. You also won’t have the opportunity to get an inspection, so go into the process expecting to do some repairs.
• Purchase through a short sale: A short sale involves buying a property directly from the homeowner before the foreclosure process has been completed. But in this case, the homeowner sells the home for less than they owe on the mortgage.

Buying a short sale home can be an attractive option for buyers as they may be able to purchase a property at a lower price than the going market rate. It’s worth noting, however, that the short sale process has the potential to take longer than a traditional home sale. Like with a pre-foreclosure, you’ll work with the seller’s agent rather than the lender.

• Research foreclosure listings online: Finding foreclosed properties begins with savvy internet sleuthing. Here’s a list of where to start finding these properties:
• HUD: The Department of Housing and Urban Development is an official government website, which lists foreclosed homes. Each listing should include the contact information for a real estate agent if you find a property that appeals to you.
• Fannie Mae: With Fannie Mae’s HomePath^®, you can easily search for homes in your area by inputting an address, city, ZIP code or MLS number — just be sure to check off “HomePath Listing” in your search filter to find the foreclosure properties.
• Freddie Mac: Freddie Mac’s HomeSteps^® is another user-friendly way to browse listings in your local area.
• Rocket Homes^SM: The Rocket Homes directory for home listings is another way to browse local properties and this resource can even specify what kind of foreclosure you’re dealing with.

House Foreclosure FAQs

Many questions can come up when you look into foreclosures. Here are some of the more common questions:

What is Preforeclosure?

In preforeclosure — the initial stage in the foreclosure process — a homeowner is at risk of losing their property due to mortgage default. This phase begins after a homeowner has fallen behind on their mortgage payments, and the lender has initiated legal proceedings to recover the outstanding debt. Preforeclosure provides an opportunity for the homeowner to explore alternatives such as loan modifications, short sales or repayment plans before the property is officially foreclosed upon by the lender.

Does the foreclosure process vary by state?

Yes, the foreclosure process varies by state. Each state has its own laws and regulations regarding foreclosure proceedings, including the required timelines and legal protections afforded to homeowners during the process.

What happens to a borrower after a foreclosure?

The good news: 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.

The bad news: 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, which 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.

How long does a foreclosure stay on my credit report?

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

When is it too late to stop a foreclosure?

It becomes increasingly difficult to stop a foreclosure once the legal process has advanced significantly. The exact timeframe varies depending on state laws; however, once the foreclosure sale or auction has taken place and ownership of the property has been transferred, it is generally too late to halt the foreclosure process.

The Bottom Line: Get Ahead of a Foreclosure by Working with Your Lender

Financial difficulties can be stressful, but don’t panic. If you find yourself getting overwhelmed, reach out to your mortgage lender to help you come up with a plan to avoid foreclosure. There are many ways to maintain ownership of your property without going into foreclosure, which can have lasting effects on your credit status and overall financial situation.

If you decide to sell your property — whether it’s to avoid a foreclosure or not — or you’re interested in buying a foreclosed property, it’s always best to work with a Verified Partner Agent.