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Foreclosure: What It Is and How to Avoid It

If you’re facing financial hardship and falling behind on your mortgage payments, here’s how to avoid losing your property.

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Around one in every 4,000 homes had a foreclosure filing near the end of 2023. If you own a home and are worried about making your monthly mortgage payments on time, it’s important to understand how foreclosure works -- and how to avoid it happening to you. 

What is foreclosure? 

A foreclosure occurs when a lender takes possession of a property because the borrower misses multiple mortgage payments. If a borrower has trouble making a mortgage payment for the past 120 days, the lender will put the loan into default and attempt to recoup what they’re owed on a mortgage. 

In other words, if you don’t make your mortgage payments, your lender can start the foreclosure process to take ownership of your home to sell it. This allows them to get back some of the money.

Foreclosure is a lengthy legal process, and the steps vary from state to state. No matter where your home is located, however, you want to avoid foreclosure at all costs. And ultimately, your mortgage lender does too, because foreclosure takes a lot of time and money. 

How common is foreclosure?

According to data from real estate firm ATTOM, more than 34,000 homeowners received notifications of impending foreclosures in October of 2023, a 6% uptick from the year prior, demonstrating that many families are struggling to make ends meet in an unaffordable housing market.

The foreclosure timeline

Foreclosure is a lender’s final step to recoup their losses if a borrower has trouble paying their loan balance. Here are all the steps of the foreclosure process:

36 days after your first missed payment: The lender is required to attempt to contact you via phone to explain any available loan modification options.

45 days after your first missed payment: You’ll receive a written notice that will include the contact number for a loan officer and information about housing counseling options.

After two missed payments: You’ll receive a demand letter requesting the missed payments. You can still stop the foreclosure process at this point by sending in the money you owe right away.

Loan modification application: Throughout the foreclosure process, you can submit an application for a loan modification or loss mitigation (they have different names with different lenders). The sooner, the better: If you submit an application at least 90 days prior to a foreclosure sale, you’ll be entitled to 14 days to review an offer for a modification.

Three to four months of missed payments: The timeline varies by lender, but you’ll get a notice of default 90 to 120 days after the missed payments. This notice will usually lay out a grace period, or reinstatement period (often 90 days), during which you can make up the money you owe to avoid foreclosure. If you don’t take advantage of this final window to get caught up on your missed payments, your lender officially starts foreclosure.

Notice of sale: If you haven’t managed to catch up with your payments or find an agreeable modification program, your lender can notify you that it will be selling the home. Once there’s a finalized foreclosure and the lender sells your property, you’ll be evicted by local law enforcement.

Types of foreclosures 

There are three types of foreclosures, but processes will vary depending on where you live. Most states employ one of the first two types of foreclosures: 

Judicial foreclosure

A judicial foreclosure is an option in all states. During this process, the lender files a lawsuit with the court to initiate the foreclosure process. The homeowner then gets a notice of the suit in the mail and has 30 days to pay all the money they owe. If they don’t, the local sheriff’s office or the court will sell the house at an auction and give the proceeds to the lender. 

Power of sale

Also called statutory foreclosure, this type of nonjudicial foreclosure is legal in most states, provided your mortgage has a power of sale clause. This clause says that if your mortgage lender demands payment and you continue to fail to pay for the period of time laid out in the clause, the lender can sell the home to recoup their money. 

Strict foreclosure

The rarest type of foreclosure, strict foreclosure, is often avoided unless the outstanding mortgage amount is greater than the property’s current market value. The process is similar to a judicial foreclosure in that the lender files a lawsuit. But rather than selling the property at a foreclosure auction, the property enters the lender’s real estate portfolio once the foreclosure is complete. 

How to avoid foreclosure

Foreclosure is very scary. But even when you have financial difficulties, you can often avoid foreclosure if you take steps to make your mortgage payments. Here are some tips to help with avoiding foreclosure.

Contact your lender ASAP

Lenders don’t want you to enter into foreclosure. They would much rather have you continue to make your payments (allowing them to make income off your mortgage loan interest). If you’re facing temporary financial hardship and struggling to make a mortgage payment, reach out to see what support your lender can provide. 

Make your loan longer

When you contact your lender, see if extending the repayment period is possible to help lower your monthly payments. A longer timeline -- extending to 30 years if you have 18 years currently remaining on your mortgage, for example -- can help shrink your monthly obligation.

Consider selling

With real estate property values at high levels in many regions, homeowners who won’t be able to keep up with their mortgage payments can consider selling before they end up in a foreclosure situation. With the proceeds from your home sale, you can pay off the outstanding balance of your mortgage and avoid foreclosure -- and the eviction and major hit to your credit score that comes with it. 

Plus, there’s a decent chance you have a chunk of equity that will help you walk away with money for a fresh start: Data from Black Knight showed that 58% of delinquent borrowers had at least 20% equity in their homes at the end of 2023. Take steps to determine your home’s market value and how much equity you have to see if selling is a smart move.

Ask about a deed in lieu of foreclosure

A deed in lieu of foreclosure is an indication that you’ve given your lender the deed instead of going through the full foreclosure process. In some states, the law technically requires you to make up your monthly payments, but the Consumer Financial Protection Bureau recommends asking your lender or mortgage company to waive additional payment responsibilities. If they agree, make sure you get the confirmation in writing to avoid being chased for a mortgage payment down the road.

Foreclosure assistance programs

Consider turning to one of these agencies that may be able to help avoid foreclosure:

Beware of foreclosure prevention scams

Some individuals and organizations often take advantage of people facing financial hardship and foreclosures under the guise of old programs. Be wary of mortgage assistance from groups that recommend assistance programs like the Making Home Affordable program, which expired in 2016, or pandemic-related forbearance assistance, which ended last year.

Additionally, if you received an offer for foreclosure assistance that sounds too good to be true, it probably is. If anyone calls you with the promise to handle all the communication with your lender or to refinance into a new loan in exchange for an immediate payment, don’t give them any information. If someone has recently reached out about your housing situation, review this guidance from the FDIC to spot any potential red flags.

Surviving foreclosure

Avoiding foreclosure isn’t always possible, and it’s not a financial death sentence. If none of the above resources can help you stop foreclosure, your first step should be to find safe housing for yourself and anyone who lives with you.

From there, establish a consistent income stream and build up your savings. Your credit score will take a dive after foreclosure, but managing your money well, including paying your bills on time and making sure you don’t use too much of your other available credit, will help you rebuild it. From there, it’s a waiting game. After seven years, the foreclosure will fall off your credit report, and you’ll have a fresh start again.

FAQs

If there is a surplus -- meaning the lender is able to recoup what you owe and there’s still money left over -- you may be entitled to the funds. Keep in mind, though, that banks are working to sell foreclosed properties as quickly as possible, which means that the pricing strategy will likely be aggressive. Additionally, foreclosure isn’t free. According to the CFPB, the average homeowner who goes through foreclosure pays $12,500 in fees.

It depends on the arrangement you have with your lender and where you are in the default and foreclosure process. If you opt for a short sale and let the lender avoid the time and paperwork involved in a foreclosure, they may agree to forgive the price difference.

It’s wise to continue paying your property taxes during a foreclosure. Your property tax bill is separate from your mortgage. If you have unpaid property taxes, you’ll have another negative mark against your credit report. 

Yes. A foreclosure will have a very negative impact on your credit score, and it will remain on your credit report for seven years.

A deed in lieu of foreclosure is a voluntary process of handing over the deed to a lender rather than going through the full foreclosure process. Most lenders will forgive the back payments you owe on the mortgage as long as the home is in good condition and there are no other outstanding liens against the property.

Kacie is a contributor to CNET.
David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he's learned from that financial balancing act to offer practical advice for personal spending decisions.
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