Foreclosure is a legal process where a lender aims to recover the balance of a defaulted loan by seizing ownership of the mortgaged property and ultimately selling it. This typically happens when the borrower misses several monthly payments, although it can also stem from other breaches of the mortgage terms.
Key Insights
- Foreclosure allows lenders to reclaim the owed amount by selling the mortgaged property due to borrower default.
- The foreclosure process varies significantly by state, with each jurisdiction having its unique requirements and timelines.
- The national average for completing a foreclosure process is approximately 857 days, although it fluctuates greatly depending on the state.
What Triggers Foreclosure?
The legal foundation of foreclosure originates from a mortgage or deed of trust agreement that allows a lender to use a property as collateral if the borrower fails to fulfill the mortgage conditions. While processes can differ, foreclosure generally begins when a borrower misses a mortgage payment. The lender usually sends a missed-payment notice, alerting the borrower of the overdue amount.
After a second missed payment, the lender will issue a demand letter, offering the borrower an opportunity to catch up on late payments. At 90 days of missed payments, a notice of default is sent. Now under the lender’s foreclosure department, the borrower has 30 additional days to settle owed amounts in what’s known as the reinstatement period. If the borrower fails to make payments during this period, foreclosure proceedings begin.
A foreclosure will surface on the borrower’s credit report within one to two months and remains there for seven years from the initial missed payment date.
State-Specific Foreclosure Processes
Each state has distinct laws governing foreclosures, which include the notices a lender must issue, the timelines, and the procedures for selling the property.
Foreclosure is typically the last step in a lengthy process. Lenders often propose alternatives to help borrowers avoid foreclosure and mitigate its negative impact for all parties involved.
Judicial Foreclosures
In 22 states, including Florida, Illinois, and New York, judicial foreclosures require lenders to go through the court system to get delinquency approval, followed by a property auction conducted by a sheriff to recover the owed balance.
Nonjudicial Foreclosures
In the remaining 28 states, including Arizona, California, Georgia, and Texas, nonjudicial foreclosure is more common. This process is faster, does not involve the court, and can occur unless the homeowner initiates legal action against the lender.
Duration of Foreclosure
The timeframe for foreclosures can vary significantly. For example, properties foreclosed in the second quarter of 2021 took an average of 922 days. This period changes by state due to differing laws and procedures.
States with Long Foreclosure Durations
- Hawaii: 3,068 days
- New York: 1,822 days
- Indiana: 1,617 days
States with Short Foreclosure Durations
- Wyoming: 173 days
- Arkansas: 253 days
- Tennessee: 270 days
Strategies to Avoid Foreclosure
Despite missed payments, borrowers can still explore methods to avoid foreclosure, which may include:
- Reinstatement: Repayment of overdue amounts, including interest and penalties, within a specified timeline to bring the mortgage current.
- Short Refinance: A new loan for less than the outstanding mortgage balance with the lender potentially forgiving the difference.
- Special Forbearance: Temporary payment reductions or deferrals due to hardships like medical bills or income loss.
Note: Mortgage lending discrimination is illegal. If suspected, borrowers can report to the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).
Consequences of Foreclosure
If a foreclosed property doesn’t sell at auction, lenders, usually banks, commonly add it to an inventory of foreclosed properties, also known as Real Estate Owned (REO).
These properties are often accessible on banks’ websites, presenting opportunities for real estate investors. Such assets might be sold at discounted prices, which can deter the lender but attract buyers.
For the borrower, a foreclosure remains on their credit report for seven years since the date of the first missed payment but is removed afterward.
Related Terms: defaulted loan, deed of trust, judicial foreclosure, nonjudicial foreclosure, pre-foreclosure, notice of default.
References
- ATTOM. “U.S. Foreclosure Activity Drops to 16-Year Low in 2020”.
- Experian. “Understanding Foreclosure”.
- Experian. “How Does a Foreclosure Affect Credit?”
- Nolo. “Chart: Judicial v. Nonjudicial Foreclosures”.
- ATTOM. “U.S. Properties with Foreclosure Filings in First Six Months of 2021 Hit All-Time Low of 65,082: Average Foreclosure Timeline Increases From Last Year”.
- ATTOM. “Average Days to Complete Foreclosure”.
- Consumer Financial Protection Bureau. “Having a Problem With a Financial Product or Service?”
- U.S. Department of Housing and Urban Development. “Complaints”.
- Experian. “How Long Does a Foreclosure Stay on Your Credit Report?”
