No one wants to deal with the fallout after a foreclosure. But if you do happen to find yourself in this situation, don’t panic. If you keep a cool head and follow best practices, you can move through the process smoothly and bounce back after some recovery time. Let’s take a look at what to do in case of a foreclosure.
A foreclosure is a type of legal action a mortgage lender will take if a homeowner fails to pay their bills on time after a period of time. It allows them to take control of a property that is in default. Borrowers facing foreclosure often feel uncertain about what if any legal rights they retain or what long-term consequences they may be subject to.
The foreclosure process will vary from state to state. There are two types of routes a lender will take when pursuing a foreclosure: judicial or non-judicial. Some states only feature one of these options while others will have both options.
A judicial foreclosure involves a court proceeding. In this case, the lender files a lawsuit against the borrower and the case goes to court. A borrower may fight the lawsuit if they choose to. If they lose, the home will go into foreclosure and will likely be sold at auction.
A non-judicial foreclosure uses the power-of-sale clause in a mortgage or deed of trust to collect the balance owed when a borrower fails to make payments. It relies on the mortgage clause which authorizes the trustee to sell the home to pay off the balance. There is no court process. This type of foreclosure tends to wrap up faster and be less expensive than a judicial foreclosure.
A foreclosure happens when a borrower fails to make their payments for long enough that they go into default or violate the terms of their mortgage loan. If a homeowner falls on hard times and is struggling financially, foreclosure isn’t always necessary. Many lenders are willing to work with you. Sometimes they may offer a solution such as a loan modification or a later payment date. But you must be proactive and give your lender a heads up when you think you need assistance.
Both judicial and non-judicial foreclosures are triggered by your first late monthly mortgage payment. After your first late payment, you may have a grace period of about 15 days to pay your mortgage. After that time period, you will likely incur a late fee. If you miss your mortgage by more than 30 days, you’ll be considered in default in most cases. There are some lenders that may consider you in default after 15 days.
If there is no power-of-sale clause in your agreement, you will likely be looking at a judicial foreclosure. You may also face a judicial foreclosure if that is the only type available in your state. You will go through the process of a non-judicial foreclosure if there is a power-of-sale clause and your state allows for it.
A judicial foreclosure is introduced with a lawsuit. Your lender will file a foreclosure lawsuit. You will need to respond within a given amount of time or the judge will likely grant your lender a default judgment. If you do respond on time, the case will go to trial or the judge will file a motion of summary judgment. A motion of summary judgment will be granted if the judge decides that there isn’t a genuine dispute about the material facts surrounding the foreclosure.
If the court finds that the foreclosure is justified, a notice of the sale might be published. The home will then go to auction on a pre-determined date and be sold to the highest bidder. You will need to vacate the property before auction day. In some states, there may be a "redemption period" after the auction in which foreclosed borrowers are allotted a specific amount of time to buy the property back.
A non-judicial foreclosure will begin once you receive a notice of default (NOD) through the mail. This form will inform you how much you own including late fees and foreclosure costs. You will likely have 90 days from when you receive the NOD to either repay what you owe or decide on a repayment agreement with your lender.
You can stop the foreclosure process by paying what you owe. You still legally own the home in the pre-foreclosure period. You can save yourself from eviction by paying the total amount owed to your lender or setting up a payment plan.
If you fail to pay what you owe your lender, you will receive a notice of sale. This will be published in your local newspaper and posted on your property. Once the notice of sale is live, they will move to put your home up for auction.
In most cases, you will have until the home is sold to vacate the premises. Once the lender sells your home, you will have no choice but to move out. The exact time you need to move out of the home will vary based on your state’s laws.
Receiving a foreclosure lawsuit or NOD isn’t a death sentence. You may still be able to fight it. This process will look different depending on whether you have a judicial or non-judicial foreclosure on your hands.
Once you receive notice of a foreclosure lawsuit, you will need to file a written answer to the complaint. It should include viable defenses and explain why the lender shouldn't be able to foreclose on your property. It’s vital to present strong evidence that the lender made an error in the foreclosure procedures. Some examples of mistakes a lender might make are failing to send you a breach letter, not following your state’s foreclosure best practices, or initiating the foreclosure process too soon. If you have a strong case, you can reverse the foreclosure and receive a deal to save your home such as a loan modification.
If you want to fight a non-judicial foreclosure you’ll need to file a lawsuit. From here, the process is similar to fighting a judicial foreclosure. You will need evidence that your lender made a mistake and that the foreclosure isn’t valid. You will need a substantial burden of proof since the foreclosure was already authorized by the mortgage or deed of trust at this point. If you’re successful, you may be able to reverse the process.
A loan modification is a written agreement that permanently changes the terms of your mortgage payments to make them more affordable. It will typically lower your interest rate and extend your loan's term. In some cases, you may even be able to add your overdue payments and late fees to the balance of your loan. Unfortunately, lenders typically won’t agree to approve principal reductions.
In order to receive a loan modification, you’ll need to get an application from your loan servicer. The application will likely require information on your income, expenses, and why you need a loan modification. Be sure to include supporting documentation. The process may come off as intimidating but most people can apply and receive a loan modification if they meet investor-specific guidelines. Requirements are as follows:
Roughly one million U.S. families endure foreclosures every year. You can and will bounce back from these circumstances. While it may take up to five years to qualify for a mortgage loan again, there are plenty of options for renting. Oftentimes, you can have a foreclosure on your record and still maintain a credit score of 580 or higher. Most rental property management companies will accept this score for their renters. If your score falls below that threshold, there are options available for you too.
As for building your score back up, you can make a full recovery from foreclosure after just two years. Some ways to do so are keeping credit cards below 10 percent of their maximum credit limit, paying bills on time, asking for a higher credit limit to increase your available credit, and more common best practices for credit improvement.
Finally, after a hit like a foreclosure, it’s time to sit with yourself and see where you can adjust your financial habits. You’re not alone. Many people struggle to get their finances under control. Roughly 40 percent of those with annual incomes over $100,000 live paycheck-to-paycheck with another 12 percent struggling to pay their bills. It’s vital to take stock of what you can cut back on and where you can save money. Things will be tight in the period after your foreclosure. But with diligence and perhaps some advice from the financial experts, you can and will make it to more stable ground.
Receiving notice that you’re facing foreclosure can feel like a waking nightmare. But many families go through this unfortunate circumstance and make it out the other side whether they fight it or recover from the aftermath of it. Arm yourself with any and all information on this process. Know your state’s laws around foreclosure front and back. And remember, no matter how bad the situation looks today, you can recover from any hardship that comes your way. Don’t lose hope!