Foreclosure occurs when you fail to pay the mortgage on your home. The lender seizes your property, evicts you, and sells the home.

What is Foreclosure?

Foreclosure occurs when you fail to pay your mortgage. If you can’t pay off your outstanding debt, or sell the property through short sale, the property will then go to foreclosure auction. If it doesn’t sell, the lender holds onto it as a real estate-owned (REO) property.

Most home buyers mean well when purchasing a home, but the process of paying monthly payments can take a toll on their lives if they are:

  • Laid off, fired, or quit their job
  • Unable to continue working due to medical conditions
  • Stuck in debt with mounting bill obligations
  • Going through a divorce
  • Moving to another state for work
  • Unable to afford maintenance issues

During the market crash from 2005 to 2011, many homeowners “walked away” from their homes due to the decrease in value of homes. This caused many homeowners to owe more money than their homes were worth. While this was not the best solution, it was a way to get immediate relief for homeowners.

What is the Foreclosure process?

The foreclosure process will differ by state, but it typically begins when you default on your loan payments and the lender files a public default notice. The foreclosure process involves five stages:

  1. Missed Payments – It all begins with a failure to make a timely mortgage payment. This typically occurs because you can’t afford to pay—whether it is due to unemployment, divorce, death, or medical challenges. If you are in a difficult situation, it’s important to talk to your lender as soon as possible. By talking to your lender, there are options available to help you keep your home, so reach out and ask.
  1. Public Notice – After three to six months of missed mortgage payments, the lender will record a public notice with the County Recorder’s Office. This is to indicate that you have defaulted on your mortgage. Some states often refer to this as a Notice of Default (NOD), or a lis pendens, which is Latin for “suit pending.”

Depending on your state’s law, the lender might be required to post the notice on the front door of your property—this is intended to make you aware that you’re in danger of losing all rights to the property.

  1. Pre-foreclosure – Once you have received a NOD from the lender, you will enter a grace period known as “pre-foreclosure,” which lasts anywhere from 30 to 120 days. During this time, you can work out an arrangement with the lender via a short sale or pay the amount owed.

If you pay off the balance during this phase, the foreclosure will end and you’ll avoid eviction and sale. However, if the default is not paid off, the foreclosure will continue.

  1. Auction – If the default is not covered by the prescribed deadline, the lender or trustee will set a date for your home to be sold at a foreclosure auction. The Notice of Trustee Sale (NTS) will be recorded with the County Recorder’s Office and a notification will be posted on your property or printed in the newspaper.

Auctions can be held on the steps of the county courthouse, in the trustee’s office, at a convention center across the country, or at the property in foreclosure. The home will be sold to the highest bidder for cash payment.

  1. Post-foreclosure – The lender will take ownership of your property if a third party does not purchase it at auction. When this happens, the property is known as bank-owned property or REO. Bank-owned properties will then be sold by a local real estate agent on the open market or at a liquidation auction.

The terms of a foreclosure are included in a mortgage contract for a property and will vary by state law.

What does Foreclosure do to your credit?

A foreclosure on your credit report is viewed negatively by lenders. While a foreclosure might not be as bad as bankruptcy, it comes in close second because you failed to pay your mortgage and lost your house. With the presence of a foreclosure on your credit report, it will make it difficult to obtain new credit at the best rates—this is especially true if you have also had problems with other credit accounts.

You will see a foreclosure on your credit report for seven years, which means it will have a long-term effect on your creditworthiness. However, since this negative information will eventually be deleted, you can begin rebuilding your creditworthiness if you take control of your debts and build a history of positive payments.

How to avoid Foreclosure

If you’re in danger of losing your home, you might think you have no other options available, but you’re wrong—there are steps you can take to avoid foreclosure.

  • Step One: Communicate with Your Lender – Don’t wait to talk to your lender if you encounter an issue. If you are going to have trouble making your mortgage payments, contact your lender immediately to let them know about your financial difficulties. Lenders will work with you to create a plan for payment.
  • Step Two: Work with the MHA Program – One way to get help is through the Making Homes Affordable (MHA) program. It provides free counselors for advice and assistance with keeping you in your home. Your state’s housing agency might have a foreclosure avoidance program too.