What Is Foreclosure: Understanding the Process and Its Impact

There are few words scarier to homeowners than “foreclosure.” However, life can be unpredictable, and sometimes missing a mortgage payment (or multiple payments) is unavoidable. It’s best to reach out to your loan servicer early if you’re falling behind on payments before it initiates the foreclosure process. Still, if you’ve received a foreclosure warning, there are steps you can take to keep your home.

What is foreclosure?

A foreclosure is a legal process your mortgage lender can take if you don’t pay your mortgage. It allows the lender to take possession of your home and sell it, usually at auction, to cover its losses. 

Depending on local laws and the details of your mortgage contract, a foreclosure can be carried out whether or not the court is involved. Either way, foreclosure can have lasting effects on your credit, finances, and future lending eligibility.

How does the foreclosure process work?

The foreclosure process isn’t all that complicated, but foreclosure laws do vary from state to state. You’ll want to reference foreclosure law in the state your home is in for specifics, but here is what you can generally expect:

1. You get behind on your mortgage: If you’ve missed several mortgage payments, your lender will begin preparing for foreclosure since you’re in default on your loan. You’ll likely receive several notices reminding you that your mortgage is due, but lenders will generally need to wait until you're 120 days behind on your mortgage to start the official foreclosure process. 
2. You’ll get an official foreclosure notice: The official start of the foreclosure process begins when you receive a Notice of Intention to Foreclose. The notice should include an explanation of how you defaulted and how much you must pay to halt the foreclosure process. 
3. A foreclosure complaint will be filed: In the case of judicial foreclosures where you’ll need to go through the court process, an official complaint will be filed with the necessary government agencies. If you have a power of sale foreclosure clause in your mortgage contract, a lender can begin the foreclosure process on its own without having to involve the courts. This can only happen after numerous warnings that you’ve missed payments. 
4. The court process begins: A judgment will be filed against you if you continue to miss payments after the initial notices. You’ll need to work with an attorney who can help you figure out how to pay the debts you’re owed and file the necessary paperwork should you attempt to make a good-faith effort to repay. 
5. A final judgment occurs: If you’re unable to reach an agreement to ward off foreclosure, a final judgment will be issued against you. Once this is entered, you lose the ability to repay the loan and you’ll need to start making plans to move out of your home. 
6. Sheriff’s sale: A notice of the foreclosure will likely be listed in your local newspaper or online, indicating to potential buyers that your foreclosed home is up for sale. A notice will also be taped to your door letting you know the timeline for the foreclosure process. Typically, at this point you’ll have two to three months before you must leave the home. 

What are the different types of foreclosure?

The foreclosure type you’ll face if you don’t make mortgage payments varies depending on where you live and the terms you agreed to in your mortgage contract. The three main types of foreclosure you’ll face are judicial foreclosure, power of sale foreclosure, and strict foreclosure. 

Judicial foreclosures

A judicial foreclosure must be ordered by a judge and often allows you, the borrower, to present a defense. If the judge rules against you and your home is foreclosed on, the court or local law enforcement will take possession of the property and auction it off to the highest bidder. 

Power of sale foreclosure

If you have a “power of sale” clause in your mortgage contract, the lender can begin foreclosing on your home without bringing you to court. In this case, your lender will need to send a series of notices and respect a waiting period before it can foreclose. Once your lender forecloses on the property, it is responsible for selling the house to recover its losses. 

Strict foreclosure

Strict foreclosures are only available in a handful of states and must be ordered by the courts. With these, a judge will give the borrower a set amount of time to pay the loan or surrender the property to the lender. If you don’t meet the terms of the judge’s ruling, the lender will have the right to foreclose. 

What are the consequences of foreclosure?

If you are being foreclosed on you’ll want to be prepared to face the consequences, such as a hit to your credit score and possible tax implications. In some states, you’ll be charged a deficiency judgment, which amounts to the difference between what you owe to your mortgage servicer and what the home sells for. 

How can you avoid foreclosure?

The best way to avoid foreclosure is to make your mortgage payments on time and in full. However, your options for avoiding foreclosure lessen if you’re already underwater on your mortgage or have received a foreclosure warning. If you’re already at risk of foreclosure, you’ll need to move fast to keep possession of your home. 

“Avoiding foreclosure requires communication and planning,” advises Steven Parangi, attorney and owner of Alpine Mortgage Services “The worst thing a borrower can do is do nothing.” 

If you’re already facing foreclosure, taking these actions can help you avoid it:

Call your lender

If you’re facing financial hardship and are afraid of foreclosure, your first call should be to your lender. Often, lenders are willing to work with you to help keep your home and will negotiate a repayment plan that works better for your finances. Some may modify the terms of your home loan if you can prove your financial circumstances have changed, or allow you to enter forbearance, which allows you to pause payments due to temporary hardship. 

Seek out the advice of a housing counselor

The U.S. Department of Housing and Urban Development (HUD) sponsors housing counselors that can help you avoid foreclosure, whether you’re hoping to remain in your home or not. HUD requires that these services be offered for free, making them accessible to anyone having a hard time keeping up with payments. To find a housing counseling agency, you can search via HUD’s website or call 800-569-4287. 

Ask your lender to agree to a short sale

A short sale is an alternative to foreclosure that lets you sell your home, often for less than what you owe on your mortgage, to avoid foreclosure. The profits from the sale are used to cover your mortgage balance, but your lender will need to agree to a short sale for you to proceed with one. If your home sells for less than you owe, your lender may or may not agree to waive the deficiency. 

“I also advise clients that selling your house, even at a short sale, is better than a foreclosure for your credit. Selling your house means you are systematically dealing with the house and can help you walk away with some cash, if possible” says bankruptcy and debt attorney Ashley Morgan.