What to Do When You Face Foreclosure
May 12, 2020
Note: If you are facing foreclosure, please contact an attorney licensed in your state for advice for your specific situation. This article is only intended to give a broad overview, and is not intended as legal advice for your particular case
Understanding the foreclosure process and staying in contact with your lender are two things you should do when foreclosure is looming on the horizon. If this applies to you, you’ll want to learn about what foreclosure is, how it differs state by state and how it can affect you. This guide covers those topics and more with resources to help you better understand more about foreclosure.
What Is Foreclosure?
Foreclosure is a process whereby a lender repossesses a borrower’s property when the borrower cannot make their payments. By then selling the house, the lender can avoid some losses and partially make up for the portion of the loan that would otherwise go unpaid.
There are three kinds of foreclosure: judicial, nonjudicial and strict.
Judicial foreclosure is allowed in every state but mandatory in 22 states. This process requires a lender to get approval for a foreclosure by proving in court that their borrower is delinquent.
Nonjudicial foreclosure, also known as power of sale, is the process used in the other 28 states. The mortgage must have a power of sale clause. This type of foreclosure is generally much faster than judicial foreclosure because it does not force a lender to go to court before foreclosing on a property. If a borrower wants to challenge a foreclosure’s legality, they must sue their lender.
Strict foreclosure is allowed in only a few states and involves the lender suing the homeowner in default.
What Does Pre-Foreclosure Mean?
Pre-foreclosure refers to the status of your home when it is in the early stages of the foreclosure and repossession process. This begins when you receive a Notice of Default, which will usually be sent after you’ve missed three months’ worth of payments.
During this stage, you can still make up for your defaulted payments. Or, if that isn’t possible, you can try to sell the property before it officially goes into foreclosure. This is known as a short sale, and your lender must agree to it. What is most important during this time is to be in contact with your lender to know what options are available to you.
What to Do When You Face Foreclosure
When you’re facing foreclosure, try taking these steps. Doing so may not fix your problems, but it might be able to buy you some time and give you some peace of mind.
- Speak to your lender. They may be willing to refinance your loan, modify the loan terms or grant you loan forbearance.
- Catch up on any payments, if you can. And if something happens that might help you catch up in the future—such as you getting a new job—let your lender know as soon as possible.
- Consider asking your lender if you can attempt a short sale. However, keep in mind that most borrowers “try to avoid a short sale if they can because it will have a long-term impact on their credit,” says Elizabeth Mendenhall, president of the National Association of Realtors. Plus you would be responsible for any portion of the loan not paid for through the short sale.
- Reach out to a HUD-approved housing counselor. HUD, the U.S. Department of Housing and Urban Development, sponsors agencies that work with lenders to help struggling homeowners. A counselor may be able to offer you advice based on your specific situation.
- And finally, learn more about what foreclosure entails so you know what to expect if you have to go through it.
The Foreclosure Process
There are commonly five stages involved in the foreclosure process.
1. You Default on Payments
If you fail to make a payment on time, you may be allowed a brief grace period, such as 15 days, to try to fulfill the payment without consequence. After that time, you will be charged a late fee and notified about your missed payment.
If you fail to pay your mortgage for an additional month or two, your lender may send you a formal demand letter. At this point, you should be in communication with your mortgage servicer about what you can do to prevent them from taking more action.
2. You Receive a Notice of Default
As we previously mentioned, you will likely receive a Notice of Default after you don’t make your payments for multiple months. This will be recorded publicly as well as issued to you personally.
Following the Notice of Default, you may have a 90-day reinstatement period during which you can settle your payments and put a halt to the pre-foreclosure process. These times vary and it is important to speak to your lender to know what you need to do to stop further foreclosure actions.
3. The Lender Files a Notice of Trustee’s Sale
A Notice of Trustee’s Sale is publicly recorded if you do not reinstate the loan within the reinstatement period. At this time, lenders will also publish information about your property in the local newspaper for at least three weeks, stating that it will be available for purchase via public auction in the future.
4. The Property Is Sold
Your property can be sold in two different ways:
- Someone can buy the property at public auction, at which point they will take immediate possession of it.
- If there are no buyers, the property becomes real estate owned (REO), which means the bank or lender retains possession. They can try to sell the property themselves now while minimizing losses as much as they can.
Either way, you will lose possession of your home.
5. You Vacate the Premises
Because you no longer own the property, you will need to vacate it. If you do not do so willingly and within a certain amount of time, the new owner can begin the eviction process to force you to leave.
How Foreclosure Affects Your Credit
A foreclosure “will likely have a large negative effect on your credit score,” says Amy Thomann, head of consumer credit education at TransUnion. The exact amount will depend on things like your score prior to the foreclosure and what else is on your report.
The item can remain on your report for seven years, although there are ways you can potentially get it removed earlier if the foreclosure information is inaccurate. Working with a credit repair firm, like Lexington Law, could be a good idea if you don’t want to try doing this on your own.
CARES Act and Foreclosure
Under the recent CARES Act, there is now a moratorium on foreclosures for those who have federally backed mortgage loans. Additionally, servicers of federally backed mortgages cannot initiate evictions due to foreclosures. Both of these restrictions last to May 18, 2020.
Because foreclosure usually means losing your home and getting a negative item on your credit report, facing it can be tough. But when you understand the foreclosure process and your role in it, you will be more prepared to handle it.
If you’d prefer help better understanding how a foreclosure and other factors can affect your credit, you can sign up for a free credit consultation now.