How Does Foreclosure Work?
Foreclosure is the legal process where an entity (usually a bank or savings & loan) that has a lien (mortgage) on a home or other type of real estate gets a court to terminate an owner’s rights after that owner has failed to make payments on that mortgage. It sounds pretty simple but, in most jurisdictions, it’s actually a reasonably involved and lengthy procedure. So how does foreclosure work?
The foreclosure process starts when the property owner misses their first payment. The lender will send letters explaining that no payment was received and that it should be sent in immediately. In many cases, another letter just like that one (but perhaps more forceful) will be sent the second month with no payment.
When the payments are two or three months overdue, the letters will become much more forceful and demand that everything be paid up to date. They will say that if you don’t do so, they will turn your account over to a lawyer to start foreclosure proceedings. They may not use the actual word “foreclosure” but the idea will be that they are going to take the property. They will also inform you that any expenses they incur including attorney fees will be added to your debt.
The next letter you will receive will be from the attorney and will demand that you pay in full or they will file foreclosure charges with the court. It’s not surprising that this letter is called a “demand letter” as there will be no polite requests in the letter. It will definitely be in a “do this or else” tone.
If you don’t respond to the demand letter, the mortgage holder’s attorney will file a “notice of default” with the court. The court will send you a notice that the notice of default has been filed and what the total amount of money is that you must pay. You will get another 3 or 4 weeks to respond to that notice.
Next, the attorney will file a “notice of sale” that will notify the homeowner when their home will be sold and by what means. Usually this is done at a Sheriff’s auction or foreclosure auction.
It’s important to note here that the mortgage holder rarely wants to foreclose on your home. They do want to believe that their chances of eventually being paid are high though. If you don’t respond to their letters, they will have no choice but to assume that you have no intention of every paying them again. If you lost your job and finding a new one is taking longer than you had hoped, the lender may accept reduced or even no payments for a while if they feel confident that you are employable. Regardless of the circumstances, keeping in close contact with the lender greatly increases your chances of staying in your home! Also, many states have laws that require a lender to give a homeowner a minimum amount of time to get current on their mortgage payments. Those laws vary from state to state.
It is also likely that whoever purchases your home may want to rent it out as an investment. If your financial situation has improved during the foreclosure process, you may be able to stay in the home as a renter or even by making a deal with the new owner to rent the home with an option to (re)purchase it!
Unfortunately, sometimes things really get bad. What will happen if there’s no way you will be able to stay in your home? Obviously from the information above, you will have a considerable amount of time to live in your home after stopping payments. That time will vary from several months to a year or more depending on numerous details. In states where trust deeds are used you will probably have about 90 days total during foreclosure. With a mortgage (the vast majority of the cases) you will get more time; perhaps much more.
Disclaimer: Laws and procedures vary from one part of the country to another. The foreclosure procedure detailed above is what occurs in the vast majority of cases but exceptions do exist. The author of this article is not an attorney and readers should not use the information contained in this article in making legal decisions.
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