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<p>Do you wonder what happens to a property when its owner experiences financial hardship and can no longer afford to pay their mortgage? In a time of economic uncertainty, it is not unusual for people to run into problems that put their property at risk. </p>



<p>Short sales and <a href="https://www.realtytrac.com/foreclosure/">foreclosures</a> are two prevalent choices in these situations. But what do these words signify, and how are they different? </p>



<p>This article explores the fascinating world of real estate financing to help you understand the key differences between a short sale and a foreclosure. Get ready to learn all there is to know about these procedures so you can handle distressed property transfers with ease.</p>



<h2 class="wp-block-heading" id="h-what-is-a-short-sale">What is a Short Sale?</h2>



<p>Simply put, a short sale is a property sale in which the earnings are insufficient to pay off all the debts and encumbrances attached to the property. Short sale and short payoffs are used interchangeably and mean selling a home for an amount that is less than the remaining balance on the mortgage.</p>



<p>It is impossible to complete a short sale unless the bank agrees to take less than the total amount owed on the mortgage loan as a “short” payment in full.</p>



<p>A short sale is bound to happen when the value of a house is less than the amount still owed on the mortgage. For example, if you bought your <a href="https://www.realtytrac.com/for-sale/0-500000_price/">home for $500,000</a> but now it’s only worth $400,000, you may qualify for a short sale as the money you get won’t be enough to pay your mortgage in full.</p>



<h2 class="wp-block-heading" id="h-what-is-foreclosure">What is Foreclosure?</h2>



<p>A foreclosure occurs when you are in default. This means you fail to make payments on your mortgage, and the lender submits a claim to the court to seize the property for nonpayment. The foreclosure procedure is the last step of legal action and usually involves a lawyer. After a foreclosure, you will no longer have any legal claim to the property and will be forced to leave.</p>



<p>Once the lender obtains possession of the property, it will request an appraisal and sell the home. Since the lender wants to liquidate the asset immediately, foreclosure often moves more quickly than a short sale. Alternatively, residences that have been foreclosed upon may be sold at public auctions known as “trustee sales.”</p>



<h2 class="wp-block-heading" id="h-short-sale-vs-foreclosure-the-difference">Short Sale Vs. Foreclosure – The Difference </h2>



<p>Foreclosure and short sales help homeowners get out from under mortgage obligations, but they go about it differently. Here are some key differences:</p>



<ol>
<li><strong>Time Duration </strong></li>
</ol>



<p>Short sales require much more time than foreclosures to finish. The bank’s primary goal during a foreclosure is to recuperate its investment. Therefore, the process usually moves swiftly. However, in the case of a short sale, banks often need many layers of permission before moving through with the transaction. This is why closing a short sale may sometimes take up to a year.</p>



<ol start="2">
<li><strong>Financial Ramifications</strong></li>
</ol>



<p>A seller’s financial status might take a hit in both processes. But the impact might be very different. A short sale can result in a dip of up to 150 points in your credit score, but it does not prevent you from purchasing a new house immediately. In contrast, there is a seven-year period after a foreclosure before purchasing another home. Additionally, it will show up on your credit report for up to five years.</p>



<ol start="3">
<li><strong>Seller’s Involvement</strong></li>
</ol>



<p>The seller has a significant role in the closing of a short sale. The process is comparable to a standard sale, except for deciding who will purchase the house. On the other hand, during a foreclosure, the bank has significant control over the process. The seller’s options are limited, and they can only attempt to negotiate a repayment plan with the bank prior to the foreclosure.</p>



<h2 class="wp-block-heading" id="h-here-s-how-short-sales-and-foreclosures-work-for-buyers">Here’s How Short Sales and Foreclosures Work for Buyers</h2>



<p>In the real estate market, purchasers might find rare bargains in short sales and foreclosures. Buyers can make better selections and more easily navigate these transactions if they have a solid grasp of how these procedures function. </p>



<p>Let’s take a look at the buyer’s side of the short sale and <a href="https://nationsinfocor.wpengine.com/resources/what-happens-when-a-property-goes-into-foreclosure/">foreclosure processes</a>.</p>



<h3 class="wp-block-heading" id="h-short-sale">Short Sale</h3>



<p>Finding short sale listings is the first step for buyers considering a short sale. The listings can be found on the internet. Consult with real estate brokers specializing in foreclosed homes, or watch local newspapers. </p>



<p>Once a possible short-sale property has been identified, purchasers should conduct extensive research and exercise due diligence. This involves considering the property’s current state, estimated market worth, outstanding debts or encumbrances, and potential repair or maintenance needs.</p>



<p>Patience and adaptability are essential to a successful strategy when dealing with short sales. These deals are difficult and time-consuming to execute since lenders can take some time to assess bids and negotiate arrangements, which might cause delays for buyers. </p>



<p>The deal is considered closed once the lender accepts the short sale offer. To ensure a smooth closing process and proper handling of all necessary documentation, buyers should seek the assistance of a reputable real estate attorney or experienced realtor.</p>



<h3 class="wp-block-heading" id="h-foreclosure">Foreclosure </h3>



<p>Foreclosed homes are <a href="https://www.realtytrac.com/foreclosure/auction/">sold at auctions</a> or listed as <a href="https://www.realtytrac.com/foreclosure/bank-owned/">real estate owned (REO)</a> by banks and made available to the general public. Buyers can find homes up for foreclosure by searching internet databases, perusing public announcements, or enlisting the help of real estate professionals who focus on such properties.</p>



<p>Buyers should do their homework and due diligence on the foreclosed property before making an offer. Checking for unpaid taxes and liens and calculating the cost of necessary repairs are all part of this process. Whether you want to know how much a piece of real estate is worth or if it’s a good investment, you need to inspect it or get expert advice.</p>



<p>Foreclosure acquisitions should be made with careful attention to financing and cash flow. Potential buyers should have access to funding or be able to acquire financing. Some auctions only accept cash, whereas bank-owned homes can be eligible for special financing. The best way to find out what financing choices are available is to go to lenders or financial consultants.</p>



<p>In foreclosure auctions, potential purchasers compete by making bids, with the highest bidder usually taking home the prize. The acquisition price of a bank-owned property may need discussion and negotiation with the bank. Purchasers must set a budget and stay within it throughout the bidding or negotiating process.</p>



<p>Once the buyer’s offer has been accepted, the closing procedure will follow the same steps as in a standard property sale. Buyers should use experts to deal with the myriad of tasks involved in a purchase, including the contract, inspections, title searches, and closing.</p>



<h1 class="wp-block-heading" id="h-conclusion">Conclusion </h1>



<p>Both homeowners experiencing financial difficulties and potential buyers interested in purchasing foreclosed homes would benefit from a clear understanding of the differences between these two types of sales.</p>



<p>Buyers should thoroughly research and work closely with sellers or lenders to ensure a successful purchase. Seeking advice from a real estate agent or lawyer specializing in distressed property purchases can provide valuable insights and simplify the process. For those looking to buy a home that meets their needs and is not in foreclosure or a short sale, it’s recommended to seek the help of a professional.</p>


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<h2 class="wp-block-heading" id="h-what-is-a-tax-lien">What Is A Tax Lien?</h2>



<p>Tax liens are a debt obligation or claim the city, town, municipality, or government makes on a property when the owner fails to pay their annual property taxes. </p>



<p>Property taxes are calculated locally in the US using a ‘total tax rate.’ The total tax rate for each property is a number – which includes all public expenses covered by taxpayers in that area – multiplied by a property’s assessed value. That way, more valuable properties pay a higher percentage in property taxes. </p>



<p>Property taxes are levied together from school districts, counties, and cities. Property taxes are always tied to the total value of the property as a percentage.</p>



<p>Property taxes fund public projects and expenses like garbage collection, roads, schools, and police. </p>



<p>In the US, the average homeowner pays just over <strong>$2,500</strong> in property taxes. Tax rates vary by state. In 2022, the states with the highest property taxes were Vermont, Connecticut, Illinois, and New Jersey, with rates ranging from 1.43% to 1.79% of the total property value. Hawaii, Alabama, and Arizona had the lowest rates, averaging 0.30%.</p>



<h2 class="wp-block-heading" id="h-what-is-a-tax-lien-foreclosure">What Is A Tax Lien Foreclosure?</h2>



<p>Contrary to popular belief, falling behind on mortgage payments is not the only way you can get your home foreclosed. A tax lien foreclosure occurs when you fail to pay your property taxes – even a small amount, much lower than the property’s value, can lead to foreclosure. </p>



<p>In Texas, property taxes are due in January (this may vary depending on the state). </p>



<p>Depending on the state you live in, failure to pay property taxes may lead to a <strong>tax lien foreclosure</strong> or a <strong>tax deed sale</strong>. Remember that this can happen even if you’ve paid your mortgage in full.</p>



<h2 class="wp-block-heading" id="h-tax-lien-foreclosure-vs-tax-deed-sale">Tax Lien Foreclosure Vs. Tax Deed Sale</h2>



<p>Tax liens and tax deed sales are the two main ways a municipality can have a legal claim against the assets of individuals or businesses that fail to pay property taxes.</p>



<p>To generate lost revenue from unpaid taxes, municipalities, and local governments offer investors the option to invest in tax liens and tax deeds by paying off the homeowner’s outstanding debt.</p>



<p>However, it’s important to note that <strong>tax lien </strong>and <strong>tax deeds </strong>differ. </p>



<p>A<strong> tax lien</strong> is a claim the government makes on a property – and investors who choose to invest in this type of lien are purchasing the right to <strong>collect interests </strong>on the unpaid property taxes and place a lien on the property. </p>



<p>Basically, investors purchase the right to act as a tax authority and collect all property tax payments from that property. Depending on the location, interest rates on property taxes range from 2%-36%. </p>



<p>Illinois is the most attractive state, with penalty interests going as high as 36%. The rate is between 16% and 18% in Florida and Arizona.</p>



<p>If <strong>the owner pays out the outstanding balance </strong>on the tax lien within the stipulated period – if you’re in Texas, that’d be in January every year –the investor who purchased the tax lien gets back their initial investment plus any interest earned along the way.</p>



<p>If <strong>the owner doesn’t pay the outstanding tax balance</strong>, the property goes into a tax deed auction. After the tax deed is sold at auction, property ownership is transferred to the buyer of the tax deed.</p>



<h2 class="wp-block-heading" id="h-financing-flexibility">Financing Flexibility</h2>



<p>If you’re looking to finance a foreclosed home purchase, the Department of Housing and Urban Development (HUD) offers excellent options for first-time homebuyers:</p>



<ul>
<li>203(k) Rehab Mortgage Insurance (Federal Housing Administration & HUD)</li>



<li>HomePath ReadyBuyer program (Fannie Mae)</li>



<li>The HomeSteps program (Freddie Mac Homes)</li>
</ul>



<p>Real estate inventors don’t qualify for these financing options – only first-time home buyers who intend to use them as their primary residence. Here’s what each of these programs offers:</p>



<ul>
<li>The 203(k) Rehab Mortgage Insurance can be used to purchase or rehabilitate a home. You can apply through an FHA-approved lender. </li>



<li>The HomePath ReadyBuyer program offers 3% of the purchase price in cost assistance for first-time homebuyers. This applies to the purchase of a HomePath property.</li>



<li>The HomeSteps program offers housebuyers – not necessarily first-time homebuyers – the option to purchase HomeSteps homes without competition from real estate investors.</li>
</ul>



<h2 class="wp-block-heading" id="h-faqs">FAQs</h2>



<h3 class="wp-block-heading" id="h-what-happens-if-you-don-t-pay-property-taxes">What Happens If You Don’t Pay Property Taxes?</h3>



<p>If you don’t pay your property taxes on time, the taxing authority may sell your property through tax foreclosure or a tax deed to pay off any outstanding debt. </p>



<p>Property taxes are calculated based on a property’s assessed value, your tax filings from the previous year, and the average local tax rate in your county.</p>



<p>This doesn’t happen overnight – in general, you have until the end of January every year to pay off your property taxes. Before you pay them off, any outstanding debt will become a lien on the property.</p>



<h3 class="wp-block-heading" id="h-how-do-i-remove-a-lien-from-my-property">How Do I Remove A Lien From My Property?</h3>



<p>If the lien on your property is accurate, the easiest way to remove it is to pay it off. After you pay it off, fill out a release-of-lien form – a clerk at your closest county office can provide one for you. The lien holder must also sign the form before a notary. Alternatively, you can hire a local attorney to take care of it.</p>



<p>If the lien on your property isn’t accurate, you’ll need to contact your lawyer. You can also contact the creditor or lien holder to provide proof of your debt.</p>



<h3 class="wp-block-heading" id="h-what-is-a-tax-yield-investment">What Is A Tax Yield Investment?</h3>



<p>Tax equivalent yield is used to visualize how much you’d earn from tax-free investments compared to taxed assets. </p>


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<h2 class="wp-block-heading" id="h-why-are-properties-foreclosed">Why Are Properties Foreclosed?</h2>



<p>Properties are foreclosed when the lender, usually a bank, regains possession of a property after the borrower fails to keep up their mortgage payments. The bank – or lender – then auctions the property to recoup their original investment.</p>



<p>According to official figures, in the first half of 2023, a total of 130,000 properties initiated foreclosure procedures. That’s a 15% and a 30% increase compared to 2022 and 2020, respectively. Experts agree that this is to be expected and that these numbers will likely increase soon as the Homeowner Assistance Fund (HAF) runs out. </p>



<p>As foreclosures increase, millions of savvy Americans look at these properties as the best chance to become homeowners – for cheap. </p>



<p>Here are some benefits of buying foreclosed properties and critical things you should consider.</p>



<h2 class="wp-block-heading" id="h-pros-of-buying-a-foreclosed-property">Pros Of Buying A Foreclosed Property</h2>



<h3 class="wp-block-heading" id="h-lower-prices">Lower Prices</h3>



<p>One of the main factors that make buying foreclosed properties so appealing is the low prices. Banks that just regained property ownership through foreclosure often sell at a discount, so they can quickly move those funds into other investments. </p>



<p>Properties are often sold at a 20%-30% discount compared to the median house price in the area. However, remember that foreclosures are sold at public auctions, so you may have to bid against other potential buyers.</p>



<h3 class="wp-block-heading" id="h-high-renovation-potential">High Renovation Potential</h3>



<p>Foreclosed properties are often subject to damage and disrepair – intentional or not – as owners don’t have the funds for regular house maintenance. Foundational cracks, leaks, and exterior damage are some of the most common issues of foreclosed properties – and the price reflects that.</p>



<p>For that reason, real estate investors and professional contractors are often looking for foreclosed homes, so they can purchase, renovate, and sell off for a quick profit. This strategy is known as flipping and is one of the most successful short-term real estate investing strategies.</p>



<p>Figures show that in 2022 the average return on house flipping was over 25% of the initial investment on every property. </p>



<p>Keep in mind that this strategy is not for beginners; you will need a deep knowledge of the market and professional counseling from contractors, lawyers, and real estate agents.</p>



<h3 class="wp-block-heading" id="h-bargaining-power">Bargaining Power </h3>



<p>Foreclosed properties are usually sold in public auctions, where potential buyers can bid. However, if there isn’t demand for the property, or if, after conducting a home inspection, you find that the property has significant damage or requires a large investment, you have some bargaining power. Banks may reconsider their asking price and settle for much less.</p>



<p>Remember that banks are not obligated to consent, but completing the sale is in their best interest. That’s why a home inspection early on is so important.</p>



<h3 class="wp-block-heading" id="h-financing-flexibility">Financing Flexibility</h3>



<p>If you’re looking to finance the purchase of a foreclosed home, there are several government-backed options you can check out:</p>



<ul>
<li>203(k) Rehab Mortgage Insurance (Federal Housing Administration & HUD)</li>



<li>HomePath ReadyBuyer program (Fannie Mae)</li>



<li>The HomeSteps program (Freddie Mac Homes)</li>
</ul>



<p>Only buyers who intend to occupy these homes as their primary residence qualify – real estate inventors and house flippers don’t qualify for these financing options.</p>



<ul>
<li>The <strong>203(k) Rehab Mortgage Insurance</strong> can be used to purchase or rehabilitate a home. You can apply through an <a href="https://www.hud.gov/program_offices/housing/sfh/lender/lenderlist"><strong>FHA-approved lender</strong></a>. </li>



<li>The <strong>HomePath ReadyBuyer</strong> program offers 3% of the purchase price in cost assistance for first-time homebuyers. This applies to the purchase of a HomePath property.</li>



<li>The <strong>HomeSteps </strong>program offers housebuyers – not necessarily first-time homebuyers – the option to purchase HomeSteps homes without competition from real estate investors.</li>
</ul>



<h2 class="wp-block-heading" id="h-cons-of-buying-a-foreclosed-property">Cons Of Buying A Foreclosed Property</h2>



<h3 class="wp-block-heading" id="h-highly-competitive-market">Highly Competitive Market</h3>



<p>Buying a foreclosure can be an excellent opportunity to flip a property or secure your dream home for cheap. </p>



<p>However, demand for foreclosed properties has increased since 2021, when the Homeowner Assistance Fund (HAF) approved the American Rescue Plan (ARP) Act, supporting homeowners during the pandemic.</p>



<p>The ARP Act supported many homeowners facing foreclosure and thus reduced the number of foreclosed properties that hit the market. There will be a lot of competition, and more foreclosed properties will likely hit the market after 2025 as the HAF finishes allocating the funds.</p>



<h3 class="wp-block-heading" id="h-you-might-not-have-time-to-inspect-the-property">You Might Not Have Time To Inspect The Property</h3>



<p>As demand for foreclosed properties and the need for liquidity rises, banks and other lenders may try to accelerate the property sale. They may offer a hefty discount for buyers willing to purchase the property immediately – ‘as is.’ </p>



<p>The main downside is that you won’t get to inspect the property – even a day of delay could mean someone else purchases it. </p>



<p>We don’t recommend purchasing a property without having it professionally inspected. Still, the more daring inventors may find a good deal. </p>



<h3 class="wp-block-heading" id="h-not-move-in-ready">Not Move-In Ready</h3>



<p>Foreclosed properties are often neglected and require urgent maintenance and repairs. If you want to move in immediately, there may be better options than foreclosed properties. Here are some of the most common issues arising from foreclosed properties:</p>



<ul>
<li>Intentional neglect by previous owners</li>



<li>Damage and disrepair</li>



<li>Foundational cracks, exterior damage, and leaks</li>



<li>Problems with the water heating, electricity, or mechanical systems</li>
</ul>



<p>Whether you purchase a property ‘as is’ or have the time to inspect it, you’ll need to invest in making it habitable. Make sure you have some money left over after you make a purchase.</p>



<h3 class="wp-block-heading" id="h-lengthy-timeframes">Lengthy Timeframes</h3>



<p>Depending on your state, even after you purchase a foreclosed property, you may not have immediate access to it. In some cases, foreclosed properties are sold occupied by previous owners or tenants, and the eviction process can take 2 to 12 weeks.</p>



<p>The process is slightly different depending on who is occupying the property. Suppose the occupant is a former tenant renting from the previous owner. In that case, the process is more complicated, as there are laws in place protecting tenants. In this case, expecting the tenants to remain for at least 60 days is more realistic.</p>



<p>If the occupant is the previous owner that defaulted on their mortgage loan, you’ll need to go through the ‘formal’ eviction process. </p>



<p>As always, we recommend getting qualified legal advice from a local real estate attorney.</p>



<h3 class="wp-block-heading" id="h-you-may-need-a-large-amount-of-cash-to-secure-a-property">You May Need A Large Amount Of Cash To Secure A Property</h3>



<p>Many government agencies will finance a foreclosure if you use it as your primary residence. However, it’s rare for private lenders to do the same with foreclosures – even for a primary residence. </p>



<p>Real estate investors and contractors looking to flip foreclosed properties without cash on hand might find it hard to locate a private lender and close a deal – especially considering how fast some foreclosed properties are sold.  </p>



<p>That’s why when it comes to buying a foreclosure, cash is king. </p>



<p>Bidders that offer an all-cash bid – cash, checks, or money orders – are more likely to secure the property. Plus, banks are more likely to accept a lower bid for the foreclosure if it’s an all-cash offer.</p>



<p>Purchasing a foreclosure can be very difficult if you don’t have that kind of liquidity.</p>



<h2 class="wp-block-heading" id="h-faqs">FAQs</h2>



<h3 class="wp-block-heading" id="h-what-is-a-disadvantage-of-a-deed-acquired-in-foreclosure">What Is A Disadvantage Of A Deed Acquired In Foreclosure?</h3>



<p>A Deed in Lieu of Foreclosure may sound like a good idea; you don’t have to go through a lengthy foreclosure, and you become the property owner immediately.</p>



<p>However, you shouldn’t always accept it. You shouldn’t accept a Deed in Lieu of Foreclosure if:</p>



<ul>
<li>The entire mortgage debt is not released (you may face title problems)</li>



<li>There are outstanding subordinate liens (you may have to foreclose that mortgage)</li>



<li>The homeowner offers a partial conveyance of the property (you may face title problems)</li>
</ul>



<h3 class="wp-block-heading" id="h-does-a-foreclosure-hurt-your-credit">Does A Foreclosure Hurt Your Credit?</h3>



<p>Yes – a foreclosure can have a long-lasting effect on your credit history. Foreclosures can drop your credit score by 100-160 points, depending on your current score. Additionally, you will lose points for missing payments before getting foreclosed. </p>



<p>Foreclosures remain on your credit report for seven years.</p>



<h3 class="wp-block-heading" id="h-how-to-buy-a-foreclosure-in-my-state">How To Buy A Foreclosure In My State?</h3>



<ul>
<li>One of the requirements to start a foreclosure process is to file a document at the county courthouse or county public records. Foreclosure auctions are public sales accessible to any buyers. </li>
</ul>



<h3 class="wp-block-heading" id="h-what-makes-buying-a-foreclosed-property-risky">What Makes Buying A Foreclosed Property Risky?</h3>



<p>The four main risks of buying a foreclosed property are:</p>



<ul>
<li>Neglect from previous owners</li>



<li>Unpaid liens</li>



<li>Lengthy foreclosure process</li>



<li>Damage and disrepair</li>
</ul>



<p>When you purchase a property, sellers must disclose information about the property’s condition. Sometimes, sellers may be legally liable if they conceal or fail to disclose information – even after completing the sale.</p>



<p><strong>This is not the case</strong> <strong>for foreclosures</strong>. A foreclosed property is always sold ‘as is,’ so it’s up to the buyer to conduct a home inspection and ensure there are no underlying issues.</p>



<h3 class="wp-block-heading" id="h-what-is-the-number-one-reason-for-foreclosure">What Is The Number One Reason For Foreclosure</h3>



<p>The number one reason for foreclosure in the US is unexpected medical expenses, accounting for more than 65% of all foreclosures. Some of the other most common reasons are:</p>



<ul>
<li>Job loss or unemployment</li>



<li>Natural disasters or major house damage</li>



<li>Increased home expenses</li>



<li>Divorce</li>
</ul>



<h3 class="wp-block-heading" id="h-how-many-months-can-you-fall-behind-on-mortgage">How Many Months Can You Fall Behind On Mortgage?</h3>



<p>You can fall behind on your mortgage 120 days before the lender can begin foreclosure. After foreclosure starts, it can take months or years before eviction, depending on your state’s and local laws.</p>


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<h2 class="wp-block-heading" id="h-what-is-foreclosure">What Is Foreclosure?</h2>



<p>Foreclosure is a legal process where a lender – usually a bank – repossesses a property after the borrower defaults on the loan. The lender then sells the property, usually in an auction, to recoup its initial investment.</p>



<p>Foreclosures happen when a homeowner fails to keep up with their mortgage payments. According to official figures, in 2022, more than 320,000 properties showed foreclosure activity, representing 0.23% of all housing units in the US. That is, 0.23% of properties fell behind on mortgage payments, received a default or foreclosure notice, scheduled auctions, or were repossessed by lenders.</p>



<p>Since it was launched in 2021, the Homeowner Assistance Fund (HAF) has assisted more than 230,000 homeowners during the pandemic. However, it’s expected that foreclosure rates will continue to rise in the near future as the HAF funds are allocated. </p>



<p>This can be a golden opportunity for home buyers to find a new home.</p>



<p>For that reason, familiarizing yourself with the foreclosure process and the timelines can be key to planning your future.</p>



<h2 class="wp-block-heading" id="h-foreclosure-timeline">Foreclosure Timeline</h2>



<p>First of all, foreclosures don’t happen overnight. Under federal law, lenders can’t <strong>start </strong>a foreclosure procedure until the borrower is <strong>at least 120 days behind </strong>on their mortgage payments. </p>



<p>But what exactly constitutes starting a foreclosure procedure?</p>



<p>In judicial states, starting a foreclosure procedure implies filing a suit, complaint, or petition – also known as a first notice – requesting a foreclosure. </p>



<p>In non-judicial states, it’s considered a first notice, any document establishing a foreclosure sale date. Lenders can’t file any of these before the 120-day mark.</p>



<p>Broadly speaking, this is how the foreclosure process goes:</p>



<h3 class="wp-block-heading" id="h-first-missed-payment-payment-default">First Missed Payment – Payment Default</h3>



<p>You missed a mortgage payment. After you miss your first payment, the lender will likely contact you. Some lenders offer a two-week grace period before issuing a late payment fee, but it’ll depend on your contract. The lender may also report your late payment to credit bureaus like Experian, Equifax, and TransUnion. </p>



<h3 class="wp-block-heading" id="h-second-missed-payment">Second Missed Payment</h3>



<p>You missed your second consecutive mortgage payment. At this point, the loan service provider will assign a worker to your case. They will try to get in contact with you to restructure the terms of the loan or find an alternative solution. If you’re going through financial hardships, we strongly recommend being honest with your lender.</p>



<p>Keep in mind that most lenders are open to restructuring the loan terms at this point. Foreclosures can be a lengthy and expensive process for all parties involved.</p>



<p>If you can’t find common ground with your lender, you will incur a second late fee, and they may report the second late payment to the credit bureaus.</p>



<p>If you don’t feel like you’re being treated fairly, you can <strong>reach out to the US Department of Housing and Urban Development (HUD)</strong> for an approved housing counselor – at no cost.</p>



<h3 class="wp-block-heading" id="h-third-missed-payment-notice-to-accelerate">Third Missed Payment – Notice To Accelerate</h3>



<p>The foreclosure process hasn’t begun at this stage, but it’s just around the corner. </p>



<p>Your lender will send you a formal letter, also known as Notice to Accelerate, informing you of the total amount owed and notifying you that you have 30 days to pay your mortgage balance – including any accumulated interest and late fees –in full or risk foreclosure.</p>



<p>Suppose you haven’t contacted a HUD-approved housing counselor. In that case, we recommend that you do so immediately – applying for loss mitigation and restructuring the loan terms is still on the table. Foreclosure proceedings will begin when the 30-day period ends. </p>



<h3 class="wp-block-heading" id="h-fourth-missed-payment-foreclosure">Fourth Missed Payment – Foreclosure</h3>



<p>If you fail to pay the full amount owed by the fourth month, you are more than 120 days behind on your mortgage payment and no longer protected under federal law – unless you filed for loss mitigation and it’s still pending. Foreclosure proceedings will now move forward.</p>



<p>From this point onwards, your lender will likely refer the loan to an attorney or trustee, and you will incur all attorney fees.</p>



<p>In judicial states, your lender will file a foreclosure lawsuit. This first notice will likely come in certified mail; if you fail to respond, the judge will grant the lender a default judgment. If you respond, the case could go to trial.</p>



<p>In non-judicial states, your lender will issue a Notice of Default (NOD). This document details how much you owe – including late fees and foreclosure costs – and gives no more than 90 days to repay.</p>



<h3 class="wp-block-heading" id="h-foreclosure-notice-of-sale">Foreclosure – Notice Of Sale</h3>



<p>After all the forms have been filed to the courts, the foreclosure process is well underway. At this point, the attorney or trustee representing the lender will issue a <strong>Notice of Sale</strong>. </p>



<p>The Notice of Sale is used to schedule a sale date – at this point, the lender will start advertising in local newspapers or listings for potential buyers. In most cases, you still have time to prevent foreclosure – you have until the date of the sale or auction to pay the total amount owed, including the attorney fees incurred.</p>



<p>This process can drag on in judicial states for months – or even years –as each step requires court approval. This process is considerably quicker in non-judicial states as they’re settled out of court – it usually takes 2-3 months.</p>



<h3 class="wp-block-heading" id="h-eviction">Eviction</h3>



<p>After the auction is finalized and the property has a new owner – or the bank repossesses it if there are no buyers –the original borrowers receive an order to evacuate if they’re still living in the foreclosed property.</p>



<p>If necessary, the local sheriff or law department may get involved to facilitate the eviction.</p>



<h2 class="wp-block-heading" id="h-how-long-is-the-foreclosure-process-in-my-state">How Long Is The Foreclosure Process In My State?</h2>



<p>In the US, most foreclosures are governed by state laws rather than federal laws. We recommend checking out the <a href="http://www.foreclosurelaw.org"><strong>United States Foreclosure Law</strong></a> in your state.</p>



<p>Generally, all states are divided into <strong>mortgage states</strong> and <strong>Deed of Trust states</strong>. Foreclosures in mortgage states must go through the court system, so foreclosures take longer – sometimes years.</p>



<p>Foreclosures in Deed of Trust states are settled out of court and don’t have to go through the court system. In these states, foreclosures can be settled within months. </p>



<h2 class="wp-block-heading" id="h-how-can-i-stop-the-foreclosure-process">How Can I Stop The Foreclosure Process?</h2>



<p>The easiest way to avoid foreclosure is to make your mortgage payments on time. Of course, this isn’t always an option. In the first quarter of 2023, almost 100,000 foreclosure notices were filed in the US.</p>



<p>Before the foreclosure process starts, there are a few things you can do:</p>



<ul>
<li>Contact a HUD-approved housing counselor</li>



<li>Restructure the term of the loan with your lender</li>



<li>Apply for loss mitigation </li>



<li>Request a mortgage forbearance</li>
</ul>



<p>Your first step should always be contacting a government-approved housing counselor. </p>



<p>If you’ve tried everything and foreclosure is unavoidable, there’s one last resource to minimize the impact on your credit score: a <strong>Deed In Lieu of Foreclosure</strong>.</p>



<p>A Deed In Lieu of Foreclosure transfers property ownership to the lender – without going through foreclosure –in exchange for relief from mortgage debt. </p>



<p>The main benefit of a Deed In Lieu of Foreclosure is that it stays on your credit report for only 4 years – compared to foreclosures, which stay for up to 7 years. You will also save up on attorney fees and other costly foreclosure proceedings.</p>



<p>As always, we recommend getting qualified legal advice from a local real estate attorney.</p>



<h2 class="wp-block-heading" id="h-faqs">FAQs</h2>



<h3 class="wp-block-heading" id="h-what-state-has-the-longest-foreclosure-process">What State Has The Longest Foreclosure Process?</h3>



<p>The states with the longest foreclosure processes are Hawaii, New Jersey, Kansas, Louisiana, and New York. These states support judicial foreclosures, and the average foreclosure takes more than five years. </p>



<h3 class="wp-block-heading" id="h-how-long-can-you-go-without-paying-your-mortgage">How Long Can You Go Without Paying Your Mortgage?</h3>



<p>In general, the foreclosure process doesn’t start until you receive a Notice of Default at the start of your fourth month of missed mortgage payments. Depending on the state, you can go up to 120 days without paying a mortgage before foreclosure begins.</p>



<h3 class="wp-block-heading" id="h-how-does-a-foreclosure-affect-you">How Does A Foreclosure Affect You?</h3>



<p>A foreclosure can have a long-lasting effect on your credit history. Foreclosures result from falling behind on mortgage payments, and since both late payments and foreclosures impact your score, the effect compounds.</p>



<p>In the most extreme cases, your credit could drop 100-160 points, and it can take anywhere from 3-7 years to fully recover.</p>



<h3 class="wp-block-heading" id="h-can-you-get-a-foreclosure-off-your-credit-report">Can You Get A Foreclosure Off Your Credit Report?</h3>



<p>If the foreclosure was reported accurately, you can’t remove it from your credit report. Instead, it’s cleared automatically no later than seven years from the Day of First Delinquency (i.e., the date of your first missed mortgage payment).</p>



<p>If the foreclosure wasn’t reported accurately, you can dispute it to remove it from your credit report. As always, we recommend getting qualified legal advice from local real estate attorneys.</p>


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