Foreclosure: How It Works And How To Avoid

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What is a foreclosure?

Foreclosure happens when the lender takes control of a property after a borrower misses multiple mortgage payments, defaulting on the loan. 

The foreclosure process can take up to several years, and if you’re not able to make up the missed payments, it can result in the loss of your home.

Foreclosure process: How does foreclosure work?

Each state has its own laws pertaining to the foreclosure process and foreclosure sales. These laws can govern your mortgage relief options if you’re already in foreclosure, how to post a notice of sale, the sale timeline and other parts of the process.

Step 1: Missed mortgage payments

If your mortgage payment is a few days late, you’re probably not at risk of foreclosure. Your lender may accept your payment without serious penalties for up to two weeks after the due date. After the grace period, however, your payment is considered late, and your lender will charge late fees. You might also receive a warning from your lender about a potential foreclosure if you fail to make the payment.

Step 2: Notice of default

After three to six missed mortgage payments, your lender will file a notice of default with the local recorder’s office. You should also receive a copy via certified mail, and depending on your state, your lender might post the notice on your front door. This notice specifies how much you owe to bring your mortgage back into good standing.

Once you’ve received a notice of default, you need to act swiftly to avoid foreclosure proceedings. “Do not let this sit,” says Andy Manthei, a business development specialist with GreenPath, a non-profit that specializes in financial and housing counseling. 

Your next step should be contacting your lender to explore options like forbearance. You may also want to contact a housing counselor. You can use the U.S. Department of Housing and Urban Development’s lookup tool to find one in your state.

A notice of default could show up on your credit report and affect your score. This can make it more challenging to get other types of credit or refinance your mortgage.

Step 3: Preforeclosure

Preforeclosure is the time between the notice of default and the auction or sale of your home. During this time, you can stop the foreclosure process by paying the amount specified in the notice of default. You might also have the option to sell your home and pay back the money owed — a process called a short sale.

The exact amount of time preforeclosure lasts depends on your state.

Step 4: Notice of sale

If you aren’t able to bring your mortgage into good standing within the allotted timeframe, your lender will file a notice of sale. Your home will be placed up for auction at a specified time and place.

The notice of sale may be published in different ways depending on your state. For example, in North Carolina, the notice must be published in a local newspaper and posted at the local courthouse. In California, it must be posted on the property, as well as a public place in the county, delivered to you via certified mail and published in your local newspaper.

Depending on your state’s laws, you might be able to exercise the right of redemption and reclaim your home up until the foreclosure sale, or even after.

Step 5: Eviction

Following the auction and sale of your home, you’ll generally have a few days to gather your belongings and move to a new residence. If you do not voluntarily move out, law enforcement personnel are legally allowed to remove you and your belongings from the premises.

Types of foreclosure

The types of foreclosures that can occur depend on your home state and mortgage terms. Some foreclosures involve legal action — judicial foreclosures — and others do not (non-judicial foreclosures). The types of foreclosures include:

• Judicial foreclosure: In a judicial foreclosure, the lender files a lawsuit and the borrower is notified of the non-payment. The homeowner has 30 days to make up the missed payments before the foreclosure process proceeds. Judicial foreclosure is a standard procedure nationwide, but certain states allow only this approach and don’t permit other types of foreclosures.
• Power of sale: A power of sale foreclosure is allowed in some states if your mortgage has a power of sale clause in the contract. Once you fall behind on your payments, your mortgage provider is allowed to put the house up for auction. A power of sale foreclosure is considered a non-judicial foreclosure because no legal action is taken.
• Strict foreclosure: Strict foreclosures are less common because only a few states allow them. In this case, the mortgage lender files a lawsuit against the homeowner, and if the homeowner does not make up their payments within the court-ordered period, the lender can seize the home.

Judicial foreclosure states

The states that only allow judicial foreclosures include:

• Judicial foreclosure states
  

  • Connecticut
  • Delaware
  • Florida
  • Illinois
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • New Jersey
  • New Mexico
  • New York
  • North Dakota
  • Ohio
  • Oklahoma
  • Pennsylvania
  • South Carolina
  • Vermont
  • Washington, D.C.
  • Wisconsin

Non-judicial foreclosure states

States that allow both types of foreclosure—judicial and non-judicial—include:

• Non-judicial foreclosure states
  

  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • California
  • Colorado
  • Georgia
  • Hawaii
  • Idaho
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Hampshire
  • North Carolina
  • Oregon
  • Rhode Island
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Virginia
  • Washington
  • West Virginia
  • Wyoming

What are the consequences of foreclosure?

Getting a mortgage after foreclosure can be challenging because of the impact on your credit score. You’ll also likely need to observe a waiting period — usually at least three years — before applying for a new loan. Other consequences of foreclosure include:

• Losing your home: You’ll need to find a new place to live with a foreclosure on your record. This won’t just have a financial impact but an emotional one as well.
• Damage to your credit: A foreclosure stays on your credit report for seven years.
• Losing your property and equity: Not only will you lose your place to live, but you’ll also lose the money and effort you put into it. This can have far-reaching impacts on your overall wealth.
• Owing money: Depending on your state’s laws, you may owe money if your home sells at the foreclosure auction for less than you owe. The amount owed is called a “deficiency.” If you can’t pay, you may be sued, face wage garnishment and more.

How to avoid foreclosure

Ultimately, avoiding foreclosure starts by communicating with your mortgage lender or servicer. It is unlikely that your lender will let you off the hook completely for your missed payments, but it can help you take action so you don’t lose your home.

“Know you’re not alone,” Manthei says. Foreclosure can be a scary experience, but there are steps you can take to get help, he explains.

Some of the best ways to avoid a home foreclosure include:

• Contact a housing counselor: According to Manthei, a housing counselor will connect you with resources and prepare you to use them. “As certified counselors, we walk homeowners through every single option available based on their situation,” he says. You can contact a local HUD housing counselor or dial the HOPE hotline at (888) 995-HOPE to connect with a housing expert for 24/7 help.
• Take advantage of forbearance programs: You may be able to apply for forbearance, which temporarily postpones your obligation to make payments. If you go this route, make sure you develop a plan for when the forbearance period ends.
• Adjust your loan terms: If you’re struggling to afford your monthly loan payment, ask your lender if they can modify your loan terms. You might be able to receive a longer loan term and a lower monthly payment.
• Get a deed-in-lieu of foreclosure: Some states allow homeowners to choose a deed-in-lieu of foreclosure, in which you agree to turn over your home to your lender to avoid foreclosure. With this option, you don’t need to pay your mortgage, but you might still be responsible for paying the difference between your home’s value and the mortgage balance.
• Set up a repayment plan: If you know that you are unable to make your mortgage payment for a given month, let your lender know as soon as possible. Your lender might set up a payment plan that involves more frequent but lower payments or deferral for a month or two.

FAQ

• How long does foreclosure take?
  

  Properties foreclosed in the fourth quarter of 2024 spent an average of 762 days in the process, according to property and real estate data firm ATTOM. Louisiana, Hawaii, New York, Wisconsin and Nevada were the five states with the longest foreclosure processes, between 3,015 and 1,750 days.

  “Every state has different laws and rules,” Manthei says. According to him, these laws drastically affect the length of the process and the options for homeowners.

• What should I do if I receive a Notice of Default?
  

  “The first thing you need to do after receiving a notice of default is contact your servicer,” Manthei says. It’s in a lender’s best interest to work with borrowers to help them stay in their homes and catch up on payments.

  “If you’re afraid to contact your lender, contact a certified housing counselor that can help you make that introduction,” Manthei says.

• Where can I find help for a foreclosure proceeding?
  

  The U.S. Department of Justice provides a list on its website of legal assistance providers that are either free or low-cost. If you’ve reached this stage in the foreclosure process, it’s also important to think about whether defending the foreclosure to keep your home is the best choice for you financially.

• What happens to my personal belongings if my home goes into foreclosure?
  

  Your personal belongings could be impounded or confiscated if your property is foreclosed on, you get evicted, and you don’t leave before law enforcement comes.

  This is how it works: After foreclosure, your lender or a new owner may file for eviction if you’re still on the property. Like foreclosure, the eviction process varies by state and location, but in general, the court must order evictions. If the court orders the eviction, you’ll receive an eviction notice. From that point, you have a certain amount of time to pack your belongings and leave the property. For instance, in Michigan, that period is 10 days, but you might be able to negotiate more time.

• Can I buy a home after going through foreclosure?
  

  You can buy a home after foreclosure, but getting a mortgage will be more difficult. In general, you’ll need to wait anywhere from two to seven years after foreclosure before being eligible for another mortgage, depending on the loan type. You’ll also need to improve your credit score and prove you have enough income to afford the new mortgage.