What Is a Foreclosure and How Does it Work?

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The clock is running out for millions of Americans who have benefited from mortgage forbearance programs during the pandemic.

The delayed or reduced mortgage payments provided by federal forbearance programs are set to end in January or February 2021, depending on the lender. But with millions still out of work and uncertainty over new unemployment benefits in 2021, millions could face tough decisions, like whether or not they can afford to make a mortgage payment once forbearance programs come to an end. 

Pro Tip

Communicate with your lender as soon as possible when you know you won’t be able to make a payment. They may have programs and resources available to help before you find yourself facing foreclosure.

If you can’t make a payment, you could face the painful scenario of losing your home. Here’s what you need to know about the foreclosure process, and how to avoid it.

How Does Foreclosure Work?

Foreclosure is when your lender repossesses your home due to falling behind on mortgage payments. Since your home is the collateral for your home loan, the bank can take it if you fall behind on payments. A single missed payment of your mortgage will trigger a series of events that can eventually lead to foreclosure, or the loss of your home: 

1. Calls From Your Lender

You’ll start getting calls from your lender usually within 24 to 48 hours of missing your mortgage payment date, says Charles Gallagher, a real estate attorney in St. Petersburg, Florida. 

“They’ll call you everyday, probably multiple times per day,” says Gallagher. “The first round of calls are not aggressive or anything, but maybe around day 14 or 15 [days late] they get a little more aggressive.” 

2. Written Correspondence

You’ll also start receiving written correspondence, such as letters indicating you need to make a payment, or that notify you of payment plans and programs that may be available from your lender. 

3. Formal Notice

At 30 days late, most lenders will serve a formal notice of default acceleration, meaning the lender will make the rest of your mortgage due immediately. Most mortgages require that this notice be served before the lender can move forward with a foreclosure of the property, says Gallagher. 

Up until this point, you’re technically only responsible for that one missing payment and, “it doesn’t really make sense to sue somebody for just that one payment,” says Gallagher.

But after the formal demand letter is served, your mortgage is accelerated. This means the entire remaining balance of your mortgage becomes due, and you’ll have 120 days (including the first 30), to pay your full balance. 

Here’s an example: Say your mortgage has $280,000 remaining in principle and your monthly payment is $2,000. On day 31 after missing a $2,000 payment, you’d be responsible for paying that entire $280,000 sum. 

“Not many people have the kind of money to cure it at that point,” says Gallagher.

Because of this, it’s crucial that you respond and work with your lender earlier on in the process. Don’t ignore those calls and written correspondence. Your lender may have options to help you with your payments that can prevent you from reaching this point. 

4. Foreclosure Proceedings: Judicial vs. Nonjudicial States 

Some states require judicial proceeding to take someone’s house. This means a lawsuit must be filed in the courts, due process has to occur, and a judge has to enter a final judgment before someone’s house can be taken by foreclosure.

That also means, in these states, there is opportunity to make your case in court before your home is formally seized. 

In the other states, known as “power of sale” states, lenders need only file a certified letter and, if the homeowner does nothing, they will lose their house without there being a court order or lawsuit involved. About two-thirds of the states are nonjudicial.

Homeowners can still challenge the foreclosure in power of sale states, but they’d need to file a lawsuit against the lender without the backstop of an automatic court proceeding.

5. Defending Against Foreclosure

There are very few reasons why you might win a foreclosure case if you failed to make your mortgage payment. 

“People will go into the courtroom to defend themselves and say things like ‘I had cancer’ or ‘I lost my job’. All factually terrible things. But none of them are defenses under the terms of the mortgage,” says Gallagher, meaning you will still likely lose your home if you’ve failed to stay current on your mortgage payments.

In some cases, you might be able to qualify for forbearance to avoid foreclosure. 

How to Avoid Foreclosure

1. Talk to your lender early on 

Don’t ignore those notices from your lender, and talk to them about your situation. They may be able to offer more help than you realize. 

Servicers are offering options like modification, deferral, or partial claim, says Ellie Pepper, a director with the National Housing Resource Center. If your house is ultimately unaffordable, you might also be able to sell your home in a preforeclosure sale. Waiting until you are in formal foreclosure proceedings will limit the options that may be available to you from your lender.

2. Talk to a housing counselor

If you’re facing foreclosure and don’t know the next steps to take, talk to a free, HUD-approved housing counselor. Housing counselors can help by advising you on the best strategy forward based on where you are in the process. They may also have access to resources and programs that you don’t know about.

3. Take advantage of forbearance if you qualify for it 

Forbearance is when your mortgage lender lets you pay your mortgage temporarily at a lower mortgage rate, or pause your payments. Nobody is entitled to forbearance, but the government or your lender may grant forbearance for extreme circumstances. 

This happened in early 2020 as part of the CARES Act due to hardship from the pandemic. Anyone who had a government-backed loan was granted a right to forbearance for 360 days with no credit damage. 

The foreclosure moratorium in the CARES Act has been extended:

  • If you have an FHA, VA, or USDA loan, foreclosure moratorium and forbearance options have been extended through 2/28/21
  • If you have an FHFA loan, the foreclosure moratorium is extended through 1/31/21

If you don’t have a government-backed loan, it’s still worth reaching out to your private mortgage lender. While they are not required to help you, some may still offer forbearance or other payment plans and resources to offer assistance. 

Another such circumstance might be forbearance granted by FEMA in an area struck by a hurricane or other natural disaster. 

But if you don’t qualify for forbearance and you’ve already made it all the way to a court setting, the chances of you losing your home are high. 

4. Seek other outside resources

The Consumer Financial Protection Bureau (CFPB), U.S. Department of Housing and Urban Development (HUD), and the Federal Finance Housing Agency (FHFA) have a resource guide for homeowners

Another new avenue for potential support is a new outreach initiative called COVID Help For Home, says Pepper. An initiative driven by members of the CFPB, the Mortgage Bankers Association, and the Urban Institute Mortgage Collaborative, among others, it seeks to promote tools and conversations that can help homeowners in need of assistance.

Also check out the National Low Income Housing Coalition’s spreadsheet of local housing programs to find rental assistance programs in your area.