What Is Foreclosure?
Updated: August 30, 2023
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Foreclosure is a legal process wherein a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Typically, foreclosures occur because the borrower became delinquent on their mortgage payments.
There are two main types of foreclosure — judicial foreclosure and nonjudicial foreclosure:
- Judicial Foreclosure: Processed through the courts — a judge reviews the evidence after the lender initiates the foreclosure. If the judge finds that the debt is valid, the foreclosure sale is scheduled.
- Nonjudicial Foreclosure: Not processed through the courts — a "power of sale" clause in the mortgage allows the lender to sell the property if the homeowner defaults.
How lenders reclaim properties varies by state law and mortgage terms. While lenders typically seek amicable solutions with borrowers, foreclosures can add legal fees and penalties for homeowners. However, solutions such as loan modifications and financial counseling can provide homeowners with alternatives to navigate the situation. Dive in to discover foreclosure intricacies.
- Foreclosure is a legal process where lenders try to recover the amount owed on a defaulted loan by taking ownership of and auctioning or selling the mortgaged property.
- The conditions for entering foreclosure may vary based on state law and the terms in the mortgage agreement.
- Although the foreclosure process varies by state, most lenders will try to work with borrowers to catch up on payments and avoid foreclosure.
- Foreclosure often causes homeowners to accumulate late fees, legal fees and other penalties on top of their mortgage.
- Homeowners can escape foreclosure with loan modifications, short sales or financial counseling, among other avenues.
Sources: Legal Information Institute: Foreclosure; CFPB: How Does Foreclosure Work?
Why Foreclosures Happen
Foreclosures are often rooted in unexpected financial instability. Common triggers include job loss, unexpected medical bills or an adjustable interest rate that increases monthly mortgage payments beyond a homeowner's ability to pay.
According to real estate data aggregator ATTOM data, one in every 752 homes (185,580 total) filed for foreclosure in the first half of 2023, up 13% compared to the same period in 2022.
Foreclosure Process
Foreclosure doesn’t happen overnight — it’s a process that unfolds over several months or even years. The typical phases of foreclosure include:
Missed payments
Missed payments of more than 120 days can trigger the mortgage servicer to send a notice of default.
Pre-foreclosure notification.
After a specific number of missed payments, the lender sends a notice stating the need to catch up or the home will enter foreclosure. It is worth noting that lenders only initiate foreclosure after 120 days of delinquency.
Public auction or trustee sale
If the homeowner can't pay off the outstanding debt or sell the home via short sale, the property is auctioned off.
Post-foreclosure and potential bank-owned properties (REOs)
If the home doesn't sell at auction, it becomes a bank-owned or real estate-owned (REO) property. Regardless of which results from the auction, the homeowner will be evicted from the property.
Consequences of Foreclosure
Navigating Foreclosure
Facing foreclosure can be daunting, but timely action can help homeowners chart a course out of foreclosure and eviction. Here are some actionable steps to consider when navigating foreclosure:
Frequently Asked Questions About Home Foreclosure
Navigating the complexities of foreclosure often raises critical questions. We address some of the most frequently asked inquiries to guide homeowners and potential buyers.
Judicial foreclosure involves court proceedings, whereas nonjudicial foreclosure operates outside the court system based on a "power of sale" clause in the mortgage.
The duration varies by state and situation but generally ranges from a few months to over a year.
After foreclosure, if the home doesn't sell at auction, it becomes an REO (bank-owned property). You may be able to purchase it then, but terms and availability can vary.
Foreclosure can significantly decrease your credit score, sometimes by 100 to 150 points or more. Foreclosure typically remains on your credit report for seven years.
A foreclosure usually remains on your credit report for seven years. However, you can lessen its impact with consistent positive financial behavior over time. Directly removing it before seven years is unlikely unless it's a result of an error or unlawful action by the lender.
Related Content
For a deeper dive into the intricacies of foreclosure and associated topics, we've curated a list of valuable resources from MoneyGeek. These handpicked articles offer insights and expert guidance to further your understanding.
Foreclosure Assistance - Explore avenues of support available for homeowners navigating foreclosure. This page provides a comprehensive guide to aid, resources and strategies tailored to those facing mortgage difficulties.
Understanding the Foreclosure Process - Get a step-by-step breakdown of the foreclosure process. From missed payments to auctions, this resource demystifies the entire process, arming you with knowledge.
Glossary of Mortgage Terms - Familiarize yourself with essential mortgage terminologies. Whether you're a first-time buyer or looking to brush up, this glossary makes complex jargon accessible.
Understanding Bankruptcy - Dive into the realm of bankruptcy, an option some consider during financial hardships. Learn about its implications, processes and how it relates to foreclosure.
About Nathan Paulus
sources
- ATTOM Data Solutions. "ATTOM Mid-Year 2023 U.S. Foreclosure Market Report." Accessed August 16, 2023.
- Consumer Financial Protection Bureau. "Foreclosure Avoidance." Accessed August 30, 2023.
- Consumer Financial Protection Bureau. "How does foreclosure work?." Accessed August 16, 2023.
- Federal Trade Commission. "Trouble Paying Your Mortgage or Facing Foreclosure." Accessed August 16, 2023.
- Legal Information Institute. "Foreclosure." Accessed August 16, 2023.