What Is the Foreclosure Process?

In a "foreclosure," a lender uses a specific legal process to recover the proceeds of a delinquent mortgage loan by selling the property. The foreclosure process differs from state to state. In some states, the process is judicial. In others, nonjudicial procedures are typical.

Also, the judicial and nonjudicial process varies in different states. However, no matter what state you live in, you can count on the foreclosure process having six basic steps.

What Are the Steps of Foreclosure?

Here's how the foreclosure process generally flows in each state, with more details below:

• Step 1: payment default
• Step 2: notice of the default
• Step 3: foreclosure process
• Step 4: foreclosure sale
• Step 5: real estate owned (REO), and
• Step 6: eviction.

Step 1: Payment Default

You most likely signed many documents when you took out the loan to buy your home. Two of those documents were a promissory note and a mortgage (or deed of trust or a similarly-named document).

• Promissory note. The promissory note is the document that creates your liability for repaying the lender the money it loaned you. By signing this document, you promise to pay back the full amount that you borrowed, plus interest.
• Mortgage or deed of trust. The mortgage or deed of trust is a contract that secures (provides collateral for) the promissory note. It creates a lien on your home. If you fail to make the payments, the mortgage or deed of trust gives the lender the ability to sell the property through the foreclosure process to recoup the money it loaned you.

So, the promissory note represents your agreement to repay the debt, and the mortgage secures this debt. Still, most people use the term "mortgage" to refer to both the loan and the collateral.

A "default" happens when you don't make a payment on your mortgage loan or if you violate the loan contract in some other way.

What Happens if You Miss a Mortgage Payment

If you don't make your monthly payment on time and the grace period expires, your loan servicer can charge a late fee to your account. Often, mortgage payments are due on the first day of the month, and many lenders provide a grace period. The grace period is usually around ten or 15 days. Also, most lenders charge around four or five percent of the payment amount for a late charge.

To find out your loan's grace period and late fee amount, check the promissory note you signed at closing. If you miss a payment, you become delinquent on the account.

What Happens if You Miss More Than One Mortgage Payment

After two missed payments, federal law usually requires the servicer to contact the borrower personally or by phone and in writing to discuss ways to avoid foreclosure and to describe various loss mitigation options.

Step 2: Notice of the Default

After you become around 90 days behind on payments, the servicer will probably send you a notification called a "breach letter" or "demand letter." This letter describes the default. Most mortgages and deeds of trust require this notification before the lender can accelerate the loan. The breach letter usually gives the borrower 30 days to pay the overdue amounts to reinstate the loan.

Also, some state laws require the lender to send the borrower a specific preforeclosure notice after a mortgage default.

When the Foreclosure Process Can Start

If you don't reinstate the loan or work out a loss mitigation option, and become more than 120 days behind on the mortgage payments, the servicer may begin the foreclosure process.

You Can Apply for Loss Mitigation Before or After Foreclosure Starts

During the 120-day preforeclosure period, you may apply for a foreclosure alternative, like a loan modification, short sale, or deed in lieu of foreclosure. The servicer then has to review your application and let you know if you qualify for loss mitigation before foreclosing.

If you don't apply for loss mitigation during the preforeclosure period, you can submit an application after foreclosure starts. Under federal law, if the servicer gets your complete loss mitigation application more than 37 days before a foreclosure sale, it can't go ahead with the foreclosure process (getting a judgment, order for sale, or holding a sale) until:

• it tells you that you don't qualify for any loss mitigation option (you might be able to appeal the decision)
• you turn down all loss mitigation options that the servicer offers, or
• you breach the terms of a loss mitigation agreement (like you don't make the payments during a trial modification).

The servicer generally isn't required to evaluate more than one loss mitigation application from you. But if you get current on the loan after submitting your initial application, you can send in another one for review.

Step 3: Foreclosure Process

State foreclosure laws and the circumstances of your case determine whether the foreclosure process will be judicial or nonjudicial.

Judicial Foreclosures Go Through Court

In a judicial foreclosure, an attorney files a lawsuit on behalf of the lender or investor in court to foreclose the home. You'll receive a copy of the complaint, sometimes called a petition, which starts the foreclosure. You then get a limited number of days, like 30, to respond to the lawsuit.

Most judicial foreclosures are uncontested, and the lender gets a default judgment against the borrower. But if you choose to file an answer and raise a valid defense, like the foreclosure process had procedural deficiencies, or you raise other substantive defenses or counterclaims, then the case goes through the litigation process like a regular civil action.

If you don't file an answer in court or if you file a response but the court decides the foreclosure should go ahead, the court will grant a judgment of foreclosure in favor of the foreclosing party and set a sale date.

Nonjudicial Foreclosures Generally Don't Involve Any Court Action

All states allow judicial foreclosures, but about half also permit nonjudicial or "power of sale" foreclosures. In a nonjudicial foreclosure, an attorney or trustee (on behalf of the lender or investor) completes certain out-of-court steps.

In a nonjudicial foreclosure, the foreclosing party has to notify the homeowner about the default and the foreclosure sale. Typically, a nonjudicial foreclosure involves one or more of the following steps, depending on state law:

• mailing the borrower a notice of default that tells how much time the borrower has to reinstate
• recording the notice of default in the local land records office
• advertising the sale in a newspaper for a few weeks before the sale, and
• mailing the borrower a notice of sale that states when the property will be sold.

Depending on state laws, a borrower might get a combined notice of default and sale, just a notice of sale, or notice by publication in a newspaper and posting on the property or in a public place. Nonjudicial foreclosures are typically much quicker than judicial ones.

To contest a nonjudicial foreclosure, you'll have to start a lawsuit.

Step 4: Foreclosure Sale

A foreclosure sale is typically an auction where the public, as well as the foreclosing party, may bid on the property. The highest bidder becomes the new owner of the home.

How the foreclosure sale works, including the rules for timing and bidding, varies by jurisdiction. State statutes often govern foreclosure sale procedures, especially for judicial foreclosures, including minimum bid requirements, appraisal requirements, deposits, and completion. But some places let the local government official, usually the sheriff, handle the details of bidding procedures.

In two states (Connecticut and Vermont), a foreclosure sale doesn't take place in some foreclosures. A judge can transfer the home directly to the lender as part of the judgment of foreclosure in a process called "strict foreclosure" without holding a foreclosure sale.

How to Stop a Foreclosure Sale

You get the right to redeem the property—and stop the foreclosure process—by paying off the entire mortgage debt up until the sale happens. To redeem, you have to pay the entire mortgage debt because the lender accelerated the loan before starting the foreclosure. (State law might also provide a post-sale right of redemption.)

You might also get the right to reinstate the loan (pay just the past-due amounts) up until a particular deadline that your state's laws or the mortgage contract sets, like five days before the sale.

Another way to stop a foreclosure sale is by filing for bankruptcy. Under federal law, the foreclosure sale is automatically stayed once you file. Filing for Chapter 7 or 13 bankruptcy will automatically trigger the automatic stay.

A Chapter 7 bankruptcy doesn't provide a way to help you catch up on payments and keep your house. But it will temporarily delay a foreclosure sale. In a chapter 13 bankruptcy, however, you get time to pay the mortgage arrears and keep the home.

Step 5: Real Estate Owned (REO)

The term "real estate owned" (REO) means a property that the lender owns after a foreclosure. A property might also become REO through another liquidation process, like a deed in lieu of foreclosure.

To get ownership of the property, the lender bids at the foreclosure sale using a credit bid. A "credit bid" is when the lender bids the amount it's owed on the loan rather than bidding with cash. Basically, the lender gets a credit at the sale up to the amount of the borrower's mortgage debt.

The lender can bid the full amount of the debt, or it may bid less. If the lender bids less than the full debt, you might have to pay a deficiency judgment.

After the lender purchases the property at the foreclosure sale and gets title to the home, the home becomes "REO." Sometimes, people refer to REO properties as "bank-owned" properties. The lender will then try to sell the property on its own, through a broker, or by using an REO asset manager.

In most cases, the foreclosing lender is the highest bidder at the foreclosure sale. But keep in mind that other parties can bid on the home at the foreclosure sale. However, they'll have to pay cash or a cash equivalent, like a cashier's check.

Step 6: Eviction

State law says how long you get to live in the property after a foreclosure sale. In some states, the law requires you to move out after the foreclosure sale to a new owner. In others, you get to live in the home until the post-sale redemption period expires or until some other action, like confirmation of the foreclosure sale, happens.

After your right to stay in the home ends, the servicer or REO management company might offer you a deal called "cash-for-keys." In this kind of arrangement, you get money in exchange for agreeing to relocate (leave the property) without the need for an eviction. You can negotiate the terms if your loan servicer offers you a cash-for-keys deal. For example, you might ask for some extra time to live in the home or for more money.

But if you don't leave the property after your legal right to stay ends or work out a cash-for-keys deal, the home's new owner (again, usually the lender) will start an eviction. The process will either be an extension of the foreclosure action or a separate lawsuit. State law governs eviction procedures.

Talk to a Foreclosure Attorney

Foreclosure procedures are different in each state. Talk to a local attorney to find out exactly how the foreclosure process works where you live, the kind of notices you'll get, and how long a foreclosure will take in your state and situation.