Understanding Foreclosure: A Comprehensive Guide
Foreclosure is a daunting process that no homeowner wants to face. It occurs when a lender takes possession of a home because the borrower fails to repay their mortgage. This process not only forces occupants to vacate their home but also has severe consequences for their credit. At O1ne Mortgage, we understand the gravity of foreclosure and are here to help you navigate through it. If you need any mortgage services, please call us at 213-732-3074.
What Is Foreclosure?
A mortgage is a type of secured loan that uses the financed property as collateral. If payments aren’t maintained, the lender has the right to seize the home and resell it to recoup the outstanding loan amount. U.S. law defines three types of foreclosure procedures: judicial foreclosure, power of sale (non-judicial) foreclosure, and strict foreclosure. The type applicable to you depends on your location and the terms of your mortgage contract.
Judicial Foreclosure
In a judicial foreclosure, the lender files a lawsuit to begin the process, typically after the borrower misses a third consecutive mortgage payment. The borrower is notified and given a specific time limit to get current on the loan, often 30 days. If payment is not made, the property is seized and sold at a public auction. All states allow judicial foreclosures, and some require it.
Power of Sale (Non-Judicial) Foreclosure
In 29 states and Washington, D.C., mortgage contracts can include a power of sale clause. This allows the lender to auction a foreclosed property without involving a judge. The lender must issue notices to the borrower and observe a waiting period before proceeding. In some states, the borrower can file a suit to have a judge review the process.
Strict Foreclosure
Connecticut and Vermont permit a form of judicial foreclosure known as strict foreclosure. Here, the lender files a suit against the borrower. If the borrower does not pay the mortgage within a court-specified time limit, the property title transfers directly to the lender without a sale. This generally occurs when the outstanding debt exceeds the property’s value.
How the Foreclosure Process Works
The foreclosure process generally involves several steps, and the timeline can vary by jurisdiction and lender policies.
First Missed Payment—30 Days Past Due
Two to three weeks after missing your first mortgage payment, the lender will notify you that your payment is past due. This marks the beginning of the pre-foreclosure phase. If your mortgage is brought current within 30 days, you may be required to pay a late payment fee, but the late payment won’t be reported to the credit bureaus.
Second Missed Payment: 60 Days Past Due
If you miss two consecutive mortgage payments, expect additional letters, phone calls, emails, and text messages from the lender. The lender will notify you of the penalties and the past-due payments required to return your loan to good standing. Each subsequent 30-day period without payment will result in additional late payments being reported to the credit bureaus.
Third Missed Payment: 90 Days Past Due
After a third straight missed payment, the lender may send a formal statement of intent to foreclose after another 30 days. The lender may also publish your name on a list of debtors subject to foreclosure.
120 Days Past Due and Beyond
After 120 days without receiving a mortgage payment, the lender may initiate foreclosure. If a judicial foreclosure applies, a judge must authorize the seizure and sale of the property, a process that can take several months to a year. If non-judicial foreclosure applies, the process can be completed in a matter of weeks.
How Does Foreclosure Impact Your Credit?
Foreclosure is a significant negative event in your credit history and will remain on your credit reports for seven years. The impact on your credit score lessens over time, and your FICO® Scores can begin to rebound as soon as two years after a foreclosure appears on your credit report. However, a full recovery could take years.
The amount by which a foreclosure can lower your credit score depends on various factors, including your score prior to the foreclosure. For example, a consumer with a 780 FICO® Score could see their score fall into the 620 to 640 range following foreclosure—a loss of up to 160 points. A consumer with a 680 FICO® Score might see their score drop into the 575 to 595 range—a decline of up to 105 points.
How to Avoid Foreclosure
If you’re willing to work with your lender, you may find them nearly as eager as you are to avoid foreclosure. Consider exploring these alternatives:
Loan Modification
If you can no longer afford your mortgage payments but have sufficient income to continue paying a smaller amount each month, your lender may agree to a mortgage modification. This involves extending the loan repayment period and increasing the total amount of interest you’ll pay, but it could allow you to remain in your home.
Short Sale
If you owe more on your mortgage than the market value of your home, your lender may agree to a short sale. You sell the home at current market value, and the lender accepts the proceeds as settlement on your loan. This will cause your mortgage to be listed as not paid as agreed on your credit reports, which has negative consequences for credit scores. Additionally, any forgiven debt may be taxable as income.
Deed in Lieu of Foreclosure
In a deed in lieu of foreclosure, you arrange with your lender to leave the home and hand over the title deed and keys. This can spare the lender time and legal fees, and some lenders may even provide a “cash for keys” stipend if you meet the move-out deadline and leave the home in good condition. As with a short sale, your loan will be reported as not paid as agreed, and any forgiven debt may be considered taxable income.
How Does a Foreclosure Sale Work?
Once a home is foreclosed upon, it is typically listed for sale “as-is” at a public auction. Many foreclosed properties are in distressed condition, and bidders usually are not permitted to inspect them before the auction. Foreclosures may also have liens that must be paid by the buyer at the time of purchase. As a result, foreclosures often sell at auction for considerably less than their market value.
If a foreclosure does not sell at auction, or when strict foreclosure transfers ownership directly to the lender, it is added to the lender’s portfolio of real estate-owned (REO) property. REO properties, which may be available for purchase at less than market value, are not typically advertised but may be listed on a lender’s website. Buying REO property typically requires hiring a real estate agent or broker to handle the sale.
The Bottom Line
Foreclosure is a challenging experience for both the homeowner and the lender. It costs borrowers their homes and significantly harms their credit. It’s also expensive and time-consuming for lenders. If you’re having difficulty making your mortgage payments, it’s wise to consult your lender as soon as possible to explore options for avoiding foreclosure.
If foreclosure proves inevitable, remember that your credit can recover eventually. You can track the credit impact of foreclosure and your eventual recovery with free credit monitoring services. At O1ne Mortgage, we are here to assist you with any mortgage service needs. Call us at 213-732-3074 for expert guidance and support.
