How does foreclosure work? What you need to know about foreclosure
If you find yourself in a situation where foreclosure seems imminent, you may be wondering how foreclosure works. There are some important things to know about foreclosure, especially if it looks like you might have one in the future.
Foreclosure is a process used by lenders to reclaim property used as collateral for a home loan. As much as the rising rate of foreclosures has been in the news lately, lenders would really rather not foreclose on your home.
Although it may seem like the opposite when the collection letters and phone calls arrive, lenders prefer to resolve the issue and avoid foreclosure. They are not in the real estate business, and selling foreclosed properties costs them a fair amount of resources. Having to sell the properties at a loss, which is often the case, leads to even greater losses for the lender.
Sitting on a huge portfolio of foreclosed properties, instead of receiving a steady stream of income from mortgage payments, can cause significant problems for the lender. The real estate market in many areas is weak, making it difficult to sell property. In many cases, foreclosed properties need a substantial renovation before they can be sold, another reason why lenders prefer to avoid a foreclosure situation altogether.
For the above reasons, being proactive and trying to find a solution to avoid foreclosure should be your first course of action if you fear your home may be in danger. If that fails and it looks like foreclosure is inevitable, here’s how foreclosure works and what you can expect.
First, you generally must be 60 days behind on your payments before a foreclosure can begin. Before you reach that milestone, we’ll typically contact you when your first mortgage payment is 30-45 days late. Do not avoid this contact. It may be your best chance to resolve your foreclosure.
After the lender contacts you or has attempted to contact you, the next step in the foreclosure process is usually a letter from the lender demanding payment. This is a formality. Typically, the letter states that you, the borrower, have 30 days to make any late payments and any late fees that have been assessed.
At this point, your delinquencies have been reported to the credit reporting agencies, so your credit score will have suffered. That’s a great reason to try to figure something out before you get really delinquent.
The next step in the foreclosure process usually occurs approximately 60 days after the lender should have received the payment. At this time, the lender will turn the delinquent account over to their legal department to initiate formal foreclosure proceedings. Your first step is usually to hire a local law firm to start the actual foreclosure. In some cases, the lender may maintain a local business as a down payment.
It is at this point in the foreclosure process that the proceedings are made public. It is a law in most jurisdictions that foreclosure notices must be made public. The foreclosure notice is filed with the county courthouse. Details of your foreclosure and delinquency will be published in the legal or real estate section of your local newspaper. In other cases, they will be posted on the county website or in the courthouse itself.
In many cases, attorneys hired by the lender will argue your case before a judge in a formal foreclosure proceeding. If the judge approves it, your house will be read for sale to the highest bidder. This usually happens around 120 days after the payment was lost. Some states allow non-judicial foreclosure proceedings and others allow judicial or non-judicial foreclosures.
However, there is a big difference in the actual time of foreclosure depending on which state the property is in. For example, the processing period in Texas, Georgia, and Tennessee is very short, 27 days, 32 days, and 40-45 days respectively. On the other hand, New Jersey, Illinois, and New York have much longer foreclosure process periods, at 270 days, 300 days, and 445 days.
Some states also allow what is called a “redemption period” where the auction winner will actually be granted the right to buy back their home. If your state has such a period, the length of the period varies. In California, Missouri and Alaska it is one year, while Minnesota allows 5 years. At the other end of the spectrum, Massachusetts, Texas, Florida, and Georgia, among other states, do not allow foreclosure redemption periods.
If you are facing potential foreclosure, the most important thing is to be proactive. Contact your lender and try a solution. It is in the best interest of both parties to do so. You don’t want to know firsthand how the foreclosure process works.