What to do when you face foreclosure

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

Sometimes, a series of financial issues happen that leave you in a situation you can’t improve. No one wants to find themselves in foreclosure, but it does happen. In 2022, the national rate of foreclosure filings was 0.23 percent of all homes.

So, what happens in a foreclosure? Understanding the process and staying in contact with your lender are two things you should do when foreclosure looms. This guide covers what foreclosure is, how it differs state by state and how it can affect you.

Foreclosure is a process through which a lender repossesses a borrower’s asset when they can’t make their payments. A foreclosure typically refers to a home, building or property, but foreclosures can also happen on assets such as cars, boats or RVs. The lender looks to repossess and sell the asset to at least 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, and it’s the typical option in 22 states. This process requires a lender to get approval for foreclosure by proving in court that its borrower is delinquent.

Nonjudicial foreclosure is when the mortgage must have a power of sale clause. This type of foreclosure is generally much faster than judicial foreclosure because it doesn’t 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 who’s in default.

Pre-foreclosure is when a home 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 payments for three months.

During this stage, you can still make up your defaulted payments. 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’s most important during this time is to contact your lender to know what options are available to you.

When you’re facing foreclosure, try taking these steps. Doing so may not fix your problems, but it might 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. If something happens that might help you catch up in the future, such as getting a new job, let your lender know as soon as possible.
• Consider asking your lender if you can attempt a short sale. However, remember 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’d be responsible for any portion of the loan not paid 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 can offer you advice based on your specific situation.

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’ll 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 communicate with your mortgage lender about how to prevent them from taking more action.

2. You receive a notice of default

As previously mentioned, you’ll likely receive a notice of default after you’ve missed several months of payments. 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 halt the pre-foreclosure process. The length of time can vary, so it’s crucial to speak to your lender to find out 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 don’t reinstate the loan within the given period. At this stage, lenders can start advertising your property, stating it will be available for purchase via public auction in the coming weeks.

4. The property is sold

Your property can be sold in two different ways:

1. Someone can buy the property at public auction, at which point they’ll take immediate possession of it.
2. If there are no buyers, the property becomes real estate owned (REO), which means the bank or lender retains possession. They normally then try to sell the property itself while minimizing losses as much as they can.

Either way, you’ll lose possession of your property.

5. You vacate the premises

Because you no longer own the property, you’ll need to vacate it. If you don’t do so willingly and within a certain amount of time, the new owner can begin the eviction process to force you to leave.

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 credit report.

The item can remain on your credit 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 is a good idea if you don’t want to try doing this on your own.

Repairing your credit after foreclosure is possible—it will just take time and dedication. Building responsible financial habits, such as paying bills on time, avoiding debt and keeping your credit utilization low, can help you repair your credit and reduce the risk of facing foreclosure again.

Start your journey to repair your credit today with Lexington Law’s free credit assessment, which includes a credit repair recommendation.

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