The threat of foreclosure is always greater in tough economic times. High unemployment, ballooning mortgage payments, a slow housing market and a credit crunch have all contributed to rising foreclosure rates across the country.
Still, many homeowners are not familiar with the actual foreclosure process. Knowledge of the foreclosure timeline and the process steps can help many homeowners avoid foreclosure and stay in their homes.
Foreclosure in a Nutshell
Simply put, foreclosure is a homeowner’s failure to make interest and/or principal payments, ending in the seizure and sale of the foreclosed home. The length and details of the process can vary from state to state, which is one reason why homeowners who have made late payments, expecting challenges making payments or already entering the foreclosure process should have knowledge of specific state laws. The details of the foreclosure process are largely determined by whether a state conducts judicial or non-judicial foreclosures (explained below). Because the foreclosure process is not regulated by the federal government, each state government is responsible for its own foreclosure law. “You basically have 51 [including Washington, DC] slightly different sets of processes,” says Rick Sharga, vice president of marketing for RealtyTrac, Inc.
The Foreclosure Timeline: Missed Payments to Lost Home
The foreclosure process unofficially begins with missed payments. Typically a lender will send notice of a missed payment to the borrower, and sometimes this missed payment can be paid up with no late fee or charge. After so many missed payments—anywhere from three to six months—the lender will either issue notice to the borrower that the loan is in default, called Notice of Default (NOD), or file with the courts and issue a lis perdens (translated to “lawsuit pending”), depending on state foreclosure laws. This is essentially the official beginning of the foreclosure process.
Once a public notice of default has been filed, the borrower may still have a chance to avoid foreclosure by bringing the loan current or correcting the default. This usually requires the borrower to pay all the missed payments as well as any incurred fees and late charges. The grace period between the filing of a NOD and the auctioning of the home is a length of time determined by each state’s law. This span of time is sometimes also referred to as the “pre-foreclosure” period. During this pre-foreclosure period, the homeowner can either bring the loan current or sell the home to pay off the loan and avoid the credit implications of having foreclosed.
Depending on the state, if the borrower has not corrected the default within a prescribed time after receiving the NOD, the homeowner will receive a Notice of Sale, which will be posted on the property, filed in the county recorder’s office in the county of the property being foreclosed and advertised in local papers. The foreclosure sale date is set at this time. The pre-foreclosure period comes to end a certain number of days prior to the foreclosure sale date. This number will vary from state to state, and the time between the issuance of the notice of sale and the actual sale is usually less than a month.
The trustee sale—or auction—of the foreclosed property happens on the date set in the notice of sale. The auction itself will typically take place in a public place in the county of the property being sold. At the auction, the property is sold to the highest bidder. If there are no buyers, the lender takes ownership of the property, also called “real estate owned,” or “REO.”
The process described above can be referred to as a “3-stage process,” with the Notice of Default, Notice of Sale and Auction serving as the three stages. A few states, including Texas, have only a two-stage process in which the Notice of Sale serves as the Notice of Default. In these states, the homeowner has far less time to make good on the default before the home is sold at auction.
In some states, there is a “redemption period” during which time the homeowner can actually buy back the home that was purchased at an auction for the selling price.
The Lesser Evils
To avoid the blemish on one’s credit history that comes with foreclosure, homeowners facing the auctioning of their home can seek a few alternative endings. One of these is the “short sale,” which is a negotiation with the lender to sell the home for less than what is owed and to forgive the difference.
Another option is called “deed in lieu of foreclosure,” in which the bank takes the property as full compensation for the debt. In this situation, the bank cannot come after the homeowner for additional money. “If foreclosure is a black mark on your credit, the short sale and deed in lieu are gray marks,” says Sharga. Both options can be appealing for banks as they avoid a long, drawn-out and costly legal foreclosure proceeding.
One final option is for the homeowner to file bankruptcy, which won’t reflect well on the credit score but will slow down the foreclosure process significantly.
Judicial and Non-Judicial Foreclosures
The details of the foreclosure process will vary depending on whether a state conducts judicial foreclosures or non-judicial foreclosures. Some states use both, but one type may be more prominent than another.
In a judicial foreclosure, the foreclosure is processed through the courts and usually begins with the lender filing a complaint that informs of the debt owed and cites reasons why foreclosure should proceed. The borrower will have a chance to be heard in court, but if the court finds in favor of the lender, the borrower will be responsible for paying the total amount owed and the specific foreclosure costs. A “sheriff’s sale” will be authorized and a date set, which is a public auction held sometimes at the county courthouse or at the property itself.
In a non-judicial foreclosure, sometimes called “power of sale” foreclosures, processes are undertaken without court action, but in accordance with specific state laws. It is in a non-judicial foreclosure that the borrower is issued a Notice of Default and then a Notice of Sale. The reinstatement period between the Notice of Default and the Notice of Sale will be determined by the state. In California, for example, there is a minimum three-month reinstatement period. Furthermore, state law will determine the amount of time between the publication of the Notice of Sale and the actual date of the property sale. Using California as an example again, this amount of time is 21 days. Like a judicial
foreclosure, a non-judicial foreclosure ends in a public auction, with the property going to the highest bidder. “Generally speaking, if a state allows both judicial and non-judicial foreclosures, the bank will go with the non-judicial process because it takes less time and costs less,” says Sharga.
Know Your State Laws
It is essential that every homeowner or potential homeowner understand their state foreclosure laws. Homeowners should also be aware of if there is a “power of sale” clause in their deed of trust or mortgage and if a foreclosure process will proceed judicially or not. State foreclosure law specifics will determine how a homeowner is informed that the loan is in default and how much time is allowed to make good on missed payments.
The U.S. Department of Housing and Urban Development (HUD) is an excellent resource for state foreclosure law. Foreclosurelaw.org is one site that breaks down foreclosure laws by state. RealtyTrac.com also allows a search-by-state to determine a homeowner’s specific foreclosure laws. “We like to say that our site is a good jumping-off point,” says Sharga. “But since many states are in the process of revising their foreclosure laws, it is always best to go to the state government site for updated foreclosure laws.”
Many homeowners will continue to face foreclosure as the economy slides deeper into a recession. Complete knowledge of one’s state foreclosure laws can be a useful tool for maintaining home ownership.
Credit: Renovate with Tommy Mac