Foreclosure is the process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership of the property. Although the foreclosure process varies by state, there are six common phases of a foreclosure procedure.

Key Takeaways

  • Foreclosure occurs when a lender seeks to seize the property used as collateral for a loan due to failure to pay.
  • There are typically six phases in the foreclosure process and the exact steps vary state by state. 
  • Before a home is foreclosed on, owners are given 30 days to fulfill their mortgage obligations. 
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How Does a Foreclosure Work?

Phase 1: Payment Default

Payment default occurs when a borrower has missed at least one mortgage payment—although the technical definition can vary by lender. After missing the first payment, the lender will reach out via a letter or telephone.

Typically, mortgage payments are due on the first day of each month, and many lenders offer a grace period until the 15th of the month. After that, the lender may charge a late payment fee and send the missed payment notice.

After the second month of missed payments, the lender will likely follow up via telephone. However, at this point, the lender may be still willing to work with the borrower to make arrangements for catching up on payments, which may include making just one payment to prevent falling further behind.

Once a borrower goes three months without making a payment, the lender generally sends a demand letter (or notice to accelerate) stating the amount in delinquency and that the borrower has 30 days to bring the mortgage current.

A mortgage in default can have three outcomes—return to good standing, be modified, or the property is repossessed or sold via foreclosure or voluntary surrender.

Phase 2: Notice of Default

A notice of default (NOD) is sent after the fourth month of missed payments (90 days past due). This public notice gives the borrower 30 days to remedy past due payments before formally starting the foreclosure process.

Most lenders will not send a notice of default until the borrower is 90 days past due (three consecutive missed payments). Thus, many times a borrower can fall behind a month or two without facing foreclosure.

Generally, federal law prohibits a lender from starting foreclosure until the borrower is more than 120 days past due.

Phase 3: Notice of Trustee’s Sale

Depending on the state, the process for initiating foreclosure is different. In some states, nonjudicial foreclosures can be done that only requires filing paperwork with the necessary court to start the process. With this, the foreclosure e process can move rather quickly. Other states have judicial foreclosures, which require court approval for each step—meaning the process takes a bit longer.

Once forms are filed with the court or necessary approval is met, the lender's attorney or foreclosure trustee will schedule a sale of the property. A notice of trustee's sale (also known as a notice of sale) is then recorded in the county where the property is located—stating the specific time and location for the sale, as well as the minimum opening bid for the property.

The lender must also generally advertise the property (newspaper ads, signs, etc.) in the weeks before the auction indicating that the property will be available at public auction.

The time from the notice of demand to the auction date varies by state, but can be as quick as 2-3 months. Up until the date of the auction the borrower can still make payment arrangements or pay the amount due, including attorney fees incurred by the lender to start the process.

Phase 4: Trustee’s Sale

The property is now placed for public auction and will be awarded to the highest bidder who meets all of the requirements. The lender (or firm representing the lender) will calculate an opening bid based on the value of the outstanding loan and any liens, unpaid taxes, and costs associated with the sale.

When a foreclosed property is purchased, it is up to the buyer to say how long the previous owners may stay in their former home.

Once the highest bidder has been confirmed and the sale is completed, a trustee’s deed upon sale will be provided to the winning bidder. The property is then owned by the purchaser, who is entitled to immediate possession.

Phase 5: Real Estate Owned (REO)

The lender will set a minimum bid, which takes into account the appraised value of the property, the remaining amount due on the mortgage, any other liens, and attorney fees. If the property is not sold during the public auction, the lender will become the owner and attempt to sell the property through a broker or with the assistance of a real estate-owned (REO) asset manager. These properties are often referred to as “bank-owned,” and the lender may remove some of the liens and other expenses in an attempt to make the property more attractive.

Phase 6: Eviction

As soon as the auction ends and a new owner is named—either the auction winner or the bank if the property is not sold—the borrowers are issued an order to evacuate if they are still living in the property. This eviction notice demands that any persons living in the house vacate the premises immediately.

Several days may be provided to allow the occupants sufficient time to leave and remove any personal belongings. Then, typically, the local sheriff or law enforcement will visit the property and remove them and impound any remaining belongings.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

Foreclosure and COVD-19 Relief

As part of legislation providing relief from the COVID-19 pandemic, borrowers may be able to avoid foreclosure if their loans are backed by the federal government—getting up to 12 months in forbearance if you are just not applying for initial forbearance. 

If your mortgage is backed by Fannie Mae or Freddie Mac, there is currently no deadline to apply for initial forbearance. If your mortgage is backed by HUD, FHA, USDA, or VA the deadline to apply for initial forbearance is Sept. 30, 2021. 

The Bottom Line

Throughout the foreclosure process, many lenders will attempt to make arrangements for the borrower to get caught up on the loan and avoid foreclosure. If there is a chance the borrower can catch up on payments—for instance, they just started a new job following a period of unemployment—it is worth speaking to the lender in hopes of making arrangements or modifying the current loan.