In most cases, foreclosure takes place when a homeowner is unable to pay their mortgage. In these instances, the mortgage holder, usually a bank, will attempt to sell the property in order to recoup the amount owed by the homeowner.
When homeowners miss a mortgage payment, the bank will notify them that they have entered into default, meaning they have not met their financial obligations to pay their monthly mortgage payment on their home. Foreclosure itself is a legal process that begins three to six months after a homeowner fails to make the agreed upon payments. Banks can also add late fees to mortgage payments that are 10 to 15 days overdue.
Three to six months after a homeowner has failed make their mortgage payments, the bank will file a public notice, known as a Notice of Default (NOD), with the county recorder’s office that states the homeowner is behind in their mortgage payments. This notice usually starts a reinstatement period, which lasts for five days before the home is eligible for auction. This step precedes the notice of sale of the property. The homeowner can stop the foreclosure process by making the outstanding payments. The timeline for filing a NOD varies, as some lenders may be willing to work with homeowners to resolve the debt. Other mortgage holders may choose to file a NOD without delay. A NOD will negatively impact a homeowner’s credit score and impede the process for refinancing the mortgage.
Regulations on foreclosure vary from state to state, though legally if a homeowner settles their financial debts, they won’t lose their property. In the U.S., there are several types of foreclosure procedures, yet the following are the most widely used.
Judicial sales are foreclosures in which the court allows a property to be auctioned to the highest bidder in order to compensate the mortgage holder or the bank for the money owed by the homeowner. Judicial sales are common in 22 states, including New York, Illinois and Florida, and usually take 480 to 700 days, following the initial missed mortgage payment.
Power of Sale
Power of sale foreclosures are handled directly by the mortgage holder or bank who will collect the money earned from the sale of the property. Used in 28 states, including Arizona, California, Georgia and Texas, power of sale foreclosures can only be interrupted if the homeowner sues the mortgage holder or bank. In some cases, banks may choose to adjust the mortgage payment schedule to allow homeowners to keep their property. This procedure is known as a special forbearance or mortgage modification.
Strict foreclosure is used in New Hampshire and Vermont. This process gives homeowners a grace period to pay their mortgage. If they are unable to do so, the mortgage holder or bank can claim ownership of the property without any obligation to sell the property.
Mortgage contracts often include acceleration clauses, which allow the mortgage holder or bank to demand full compensation of the mortgage if the homeowner fails to make a payment. If the mortgage contract does not include an acceleration clause, mortgage holders or banks must wait until all payments are owed or the court decides to sell the property to initiate foreclosure proceedings and collect the debt.