Home What is a Foreclosure?

What is a Foreclosure?

by Pete Beeda
The first steps to navigating the foreclosure process is understanding the basics outlined on this page with the video below.   Arming yourself with all of the relevant information is crucial to making the  right decision for you, your family, and your property.  Please feel free to  contact us with any questions and/or comments you may have.  We hope you find  this material useful.

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The Foreclosure Process & Timeline

Understanding the Foreclosure Process and Timeline are critical for any homeowner considering a short sale. California is a Non-Judicial State, meaning the foreclosure is process proceeds without any intervention from the courts. When a loan default occurs, the homeowner will be mailed a default letter and a Notice of Default (NOD) will be recorded at approximately the same time. If the homeowner does not cure the default within a certain amount of time, a Notice of Trustee Sale (NTS) will be sent to the homeowner and recorded with the County Recorder and a public auction date will be scheduled. After the legally required time period has expired, the public auction will be held and the highest bidder at the auction will obtain the title to the property. Often the highest bidder is the bank who holds the mortgage on the property, as there are often no other bidders at the auction with cash in hand to bid against the mortgage holder. By understanding foreclosure process the homeowner can use it to their advantage when it comes to timing and structuring your deal.

The Differences Between the Liens and Mortgages

Obtaining the best possible outcome with the  least amount of liability for the homeowner should always be the top priority for any short sale service provider.  In order to accomplish this, both the  homeowner and their agents must know the difference between a 1st  mortgage, true 2nd mortgage, and a home equity line of credit (HELOC).  This is  important for determining how to structure and negotiate your deal properly with the bank(s).  Every short sale deal is different and utilizing the correct negotiation strategies and tactics is key to obtaining the least amount of  liability as possible for the homeowner.

Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Typically, default is triggered when a borrower misses a specific number of monthly payments, but it can also happen when the borrower fails to meet other terms in the mortgage document.

KEY TAKEAWAYS

Foreclosure is a legal process that allows lenders to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property.
The foreclosure process varies by state, but in general, lenders try to work with borrowers to get them caught up on payments and avoid foreclosure.
The average number of days for the foreclosure process is 673; however, the timeline varies greatly by state.
Understanding Foreclosure
The foreclosure process derives its legal basis from a mortgage or deed of trust contract, which gives the lender the right to use a property as collateral in case the borrower fails to uphold the terms of the mortgage document.

Although the process varies by state, the foreclosure process generally begins when a borrower defaults or misses at least one mortgage payment. The lender then sends a missed payment notice that indicates they haven’t received that month’s payment.

If the borrower misses two payments, the lender sends a demand letter. While this is more serious than a missed payment notice, the lender may still be willing to make arrangements for the borrower to catch up on the missed payments.

The lender sends a notice of default after 90 days of missed payments. The loan is handed over to the lender’s foreclosure department, and the borrower typically has another 90 days to settle the payments and reinstate the loan (this is called the reinstatement period).

At the end of the reinstatement period, the lender will begin to foreclose if the homeowner has not made up the missed payments.

If your mortgage is backed by the federal government and you are behind on your mortgage because of a COVID-19-related financial hardship, you may be eligible to suspend payments for as long as 12 months with no late fees.
The Foreclosure Process Varies by State
Each state has laws that govern the foreclosure process, including the notices a lender must post publicly, the homeowner’s options for bringing the loan current and avoiding foreclosure, and the timeline and process for selling the property.

A foreclosure — as in the actual act of a lender seizing a property — is typically the final step after a lengthy pre-foreclosure process. Before foreclosure, the lender may offer several alternatives to avoid foreclosure, many of which can mediate a foreclosure’s negative consequences for both the buyer and the seller.

In 22 states — including Florida, Illinois, and New York — judicial foreclosure is the norm. This is where the lender must go through the courts to get permission to foreclose by proving the borrower is delinquent. If the foreclosure is approved, the local sheriff auctions the property to the highest bidder to try to recoup what the bank is owed, or the bank becomes the owner and sells the property through the traditional route to recoup its losses.

The other 28 states — including Arizona, California, Georgia, and Texas — primarily use non-judicial foreclosure, also called the power of sale. This type of foreclosure tends to be faster than a judicial foreclosure, and it does not go through the courts unless the homeowner sues the lender.

How Long Does Foreclosure Take?

 Properties foreclosed in the first quarter of 2020 (the most recent data available) had spent an average of 673 days in the foreclosure process, according to the U.S. Foreclosure Market Report from ATTOM Data Solutions, a property data provider. That’s down 19% from an average of 834 days for properties foreclosed in the third quarter of 2019.1The average number of days varies by state because of varying laws and foreclosure timelines. The states with the longest average number of days for properties foreclosed in the first quarter of 2020 were: 1
  1. Hawaii (1,673 days)
  2. Indiana (1,361 days)
  3. Louisiana (1,243 days)
  4. New York (1,226 days)
  5. Florida (1,022 days)

States with the shortest average times to foreclose during the same period were:

  1. Arkansas (157 days)
  2. Wyoming (172 days)
  3. New Hampshire (184 days)
  4. Virginia (190 days)
  5. Minnesota (202 days)
The graph below shows the quarterly average days to foreclosure since the first quarter of 2007.1Average days to complete foreclosure Image source: ATTOM Data Solutions. Can You Avoid Foreclosure? Even if a borrower has missed a payment or two, there may still be ways to avoid foreclosure. Some alternatives include:Reinstatement: During the reinstatement period, the borrower can pay back what he or she owes (including missed payments, interest, and any penalties) before a specific date to get back on track with the mortgage. Short refinance: This is a type of refinancing where the new loan amount is less than
  • Short refinance: This is a type of refinancing where the new loan amount is less than the outstanding balance, and the lender may forgive the difference to help the borrower avoid foreclosure.
  • Special forbearance: If the borrower has a temporary financial hardship—such as medical bills or a decrease in income—the lender may agree to reduce or suspend payments for a set amount of time.

Consequences of Foreclosure

If a property fails to sell at a foreclosure auction or if it otherwise never went through one, lenders—often banks—typically take ownership of the property and may add it to an accumulated portfolio of foreclosed properties, also called real-estate owned (REO).Foreclosed properties are typically easily accessible on banks’ websites. Such properties can be attractive to real estate investors because in some cases, banks sell them at a discount to their market value, which of course, in turn, negatively affects the lender.For the borrower, a foreclosure appears on a credit report within a month or two—and stays there for seven years from the date of the first missed payment. After seven years, the foreclosure is deleted from the borrower’s credit report.