What Is Foreclosure?

Foreclosure occurs when a lender takes possession of a home because the borrower fails to repay their mortgage. This process is regulated and requires multiple notices to the borrower, often involving a judge’s review. The steps and timeline for foreclosure can vary by jurisdiction, lender policies, and the housing market.

Types of Foreclosure

Judicial Foreclosure

In a judicial foreclosure, the lender files a lawsuit to begin the process, typically after the borrower misses three consecutive mortgage payments. If the borrower does not get current on the loan within a specified time, the property is seized and sold at a public auction. All states allow judicial foreclosures, and some require it.

Power of Sale (Non-Judicial) Foreclosure

In 29 states and Washington, D.C., mortgage contracts can include a power of sale clause. This allows the lender to auction a foreclosed property without involving a judge. The lender must issue notices to the borrower and observe a waiting period before proceeding. Some states allow the borrower to file suit to have a judge review the process.

Strict Foreclosure

Connecticut and Vermont permit a form of judicial foreclosure known as strict foreclosure. If the borrower does not pay the mortgage within a court-specified time, title to the property transfers directly to the lender without a sale. This generally occurs when the outstanding debt exceeds the property’s value.

How the Foreclosure Process Works

The foreclosure process generally involves the following steps:

First Missed Payment—30 Days Past Due

Two to three weeks after the due date of your first missed mortgage payment, the lender will notify you that your payment is past due. This marks the beginning of pre-foreclosure. If your mortgage is brought current within 30 days, you may be required to pay a late payment fee, but the late payment won’t be reported to the credit bureaus.

Second Missed Payment: 60 Days Past Due

If you miss two mortgage payments in a row, you can expect additional letters and communications from the lender. The payment will be considered late and reported to the credit bureaus after 30 days.

Third Missed Payment: 90 Days Past Due

After a third straight missed payment, the lender may send a formal statement of intent to foreclose after another 30 days. The lender may also publish your name on a list of debtors subject to foreclosure.

120 Days Past Due and Beyond

After 120 days without receiving a mortgage payment, the lender may initiate foreclosure. The process can take several months to a year for judicial foreclosures, while non-judicial foreclosures can be completed in weeks.

How Does Foreclosure Impact Your Credit?

Foreclosure is a significant negative event in your credit history, remaining on your credit reports for seven years. The impact on your credit score depends on various factors, including your score prior to foreclosure. Higher scores tend to lose more points. For example, a 780 FICO® Score could drop to 620-640, while a 680 FICO® Score might fall to 575-595.

How to Avoid Foreclosure

If you’re willing to work with your lender, you may find them eager to avoid foreclosure. Consider these alternatives:

Loan Modification

If you can no longer afford your mortgage payments but have sufficient income to continue paying a smaller amount, your lender may agree to a mortgage modification. This involves extending the loan repayment period and increasing the total interest paid but allows you to remain in your home.

Short Sale

If you owe more on your mortgage than the home’s market value, your lender may agree to a short sale. You sell the home at current market value, and the lender accepts the proceeds as settlement. This will negatively impact your credit scores and any forgiven debt may be taxable as income.

Deed in Lieu of Foreclosure

In this procedure, you arrange with your lender to leave the home and hand over the title deed and keys. Some lenders may offer a “cash for keys” stipend if you meet the move-out deadline and leave the home in good condition. This will also negatively impact your credit scores and any forgiven debt may be taxable as income.

How Does a Foreclosure Sale Work?

Once a home is foreclosed upon, it is typically listed for sale “as-is” at a public auction. Many foreclosed properties are in distressed condition and bidders usually cannot inspect them before the auction. If a foreclosure does not sell at auction, it becomes real estate-owned (REO) property, which may be available for purchase at less than market value.