The foreclosure process isn't something any homeowner wants to go through. And yet, the Mortgage Bankers Association estimates that 250,000 new families enter into foreclosure every three months in America.
So what actually happens in the foreclosure process? Does a foreclosure always mean a lender will take away your home?
Here's a look at the steps a homeowner will likely go through—plus some ways to get off this train and stop a foreclosure from happening.
A bank can't just foreclose on a home whenever it wants. Homeowners have to first default on their mortgage, failing to pay their required monthly payments. And it's rare for lenders to begin foreclosure proceedings after just one late mortgage payment.
"They will usually give the borrower a grace period because they recognize the reality that people face temporary financial hardship at some point in their lives," explains Lisa Blake, a real estate broker and owner of The Blake Team in Aurora, CO.
That said, banks want their money, so borrowers can expect an influx of emails, letters, and phone calls from their lender or bank trying to collect.
Lenders usually offer alternatives during this period, including different payment plans to help the homeowner get back on track, keep their home, and keep paying their monthly mortgage bill. This is partly because it's in a lender's best interest to make things work—after all, the lender wants its money. But it's also the law in many states, says real estate attorney and broker Bryan Zuetel of Esquire Real Estate in Irvine, CA.
In many states, a lender or servicer cannot file a notice of default until 30 days after contacting the homeowner to assess the homeowner's financial situation and explore options to avoid foreclosure, Zuetel explains.
Termed a foreclosure avoidance assessment, this period might include requests for a payment adjustment, interest adjustment, deferral, or other accommodations.
You can also get foreclosure avoidance counseling at HUD.gov or by calling 888-995-HOPE. Selling the home to cover the mortgage might also be an option at this point, so Blake advises calling a real estate professional during this time to take advantage of all your options.
"It is not uncommon to see homeowners sell their home, pay off the missed mortgage payments plus fees, and then downsize to a more affordable living situation and avoid foreclosure all together," Blake notes.
2. Notice of default
If a borrower can't come up with the funds to pay what he or she owes, a lender will issue a notice of default. This form will be sent to the mortgagee in the mail via a certified letter, and it typically gives a homeowner 90 days to pay off the most recent bill.
"This step marks the beginning of the formal and public foreclosure process," Zuetel says.
There's still time to save your home after a notice of default—if you can find the cash. One option is a mortgage reinstatement, whereby you “reinstate” your mortgage by making up all the missed payments at once, plus interest and lender fees. You'll then go back to paying your monthly bill as usual.
3. Notice of sale
If the homeowner hasn't come up with the money within 90 days of the notice of default, the lender may proceed with the foreclosure process. Next comes a notice of sale, which will state that the trustee (the lender) will sell the home at auction within 21 days.
A notice of sale is also sent via certified letter to the homeowner, but it also must be published weekly in a newspaper in the county where the home is located for three consecutive weeks before the auction date. This helps get the word out to potential buyers, but even at this late date, the option to reinstate your mortgage is still possible up until five days before the sale, so long as you can come up with the money.
The home will be sold at a public auction to the highest bidder, who will have to pay the full amount of the bid immediately. This buyer will receive a trustee's deed once the sale is complete, at which point he becomes the official owner.
From there, the home's new owner must serve any remaining occupant of the home with a three-day written notice to “quit” (move out).
"If the occupant does not move out in the three days, the bidder must go through the formal eviction process in court in order to get possession of the home," Zuetel notes.
What happens if a foreclosed home doesn't sell?
If a house isn't sold at auction, the property becomes what's known as an REO, or real estate owned property. But don't assume this is a free pass to stay in the home.
"If the bank owns the foreclosure, more often than not, they will arrive at the property shortly after the foreclosure date and kick you out," Blake warns. "They might offer the previous homeowners 'cash for keys' or relocation assistance, where the bank offers a certain amount of money to the previous homeowners to vacate the premise."
While you can't count on this money, it can't hurt to ask in case this sum helps you move out, and on with your life.