How Foreclosure Works

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The threat of foreclosure is always greater in tough economic times. High unemployment, ballooning mortgage payments, a slow housing market and a credit crunch have all contributed to rising foreclosure rates across the country. Still, many homeowners are not familiar with the actual foreclosure process. Knowledge of the foreclosure timeline and the process steps can help many homeowners avoid foreclosure and stay in their homes. Foreclosure in a Nutshell Simply put, foreclosure is a homeowner’s failure to make interest and/or principal payments, ending in the seizure and sale of the foreclosed home. The length and details of the process can vary from state to state, which is one reason why homeowners who have made late payments, expecting challenges making payments or already entering the foreclosure process should have knowledge of specific state laws. The details of the foreclosure process are largely determined by whether a state conducts judicial or non-judicial foreclosures (explained below). Because the foreclosure process is not regulated by the federal government, each state government is responsible for its own foreclosure law. “You basically have 51 [including Washington, DC] slightly different sets of processes,” says Rick Sharga, vice president of marketing for RealtyTrac, Inc. The Foreclosure Timeline: Missed Payments to Lost Home The foreclosure process unofficially begins with missed payments. Typically a lender will send notice of a missed payment to the borrower, and sometimes this missed payment can be paid up with no late fee or charge. After so many missed payments—anywhere from three to six months—the lender will either issue notice to the borrower that the loan is in default, called Notice of Default (NOD), or file with the courts and issue a lis perdens (translated to “lawsuit pending”), depending on state foreclosure laws. This is essentially the official beginning of the foreclosure process. Once a public notice of default has been filed, the borrower may still have a chance to avoid foreclosure by bringing the loan current or correcting the default. This usually requires the borrower to pay all the missed payments as well as any incurred fees and late charges. The grace period between the filing of a NOD and the auctioning of the home is a length of time determined by each state’s law. This span of time is sometimes also referred to as the “pre-foreclosure” period. During this pre-foreclosure period, the homeowner can either bring the loan current or sell the home to pay off the loan and avoid the credit implications of having foreclosed. Depending on the state, if the borrower has not corrected the default within a prescribed time after receiving the NOD, the homeowner will receive a Notice of Sale, which will be posted on the property, filed in the county recorder’s office in the county of the property being foreclosed and advertised in local papers. The foreclosure sale date is set at this time. The pre-foreclosure period comes to end a certain number of days prior to the foreclosure sale date. This number will vary from state to state, and the time between the issuance of the notice of sale and the actual sale is usually less than a month. The trustee sale—or auction—of the foreclosed property happens on the date set in the notice of sale. The auction itself will typically take place in a public place in the county of the property being sold. At the auction, the property is sold to the highest bidder. If there are no buyers, the lender takes ownership of the property, also called “real estate owned,” or “REO.”

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