Foreclosure Process: The Timeline Leading Up to Repossession
A timeline of each event in the foreclosure process
Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:
- The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
- The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
- A third party buys the property at a public auction at the end of the pre-foreclosure period.
- The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).
How does Foreclosure work?
To foreclose in accordance with the judicial procedure, a lender must prove that the mortgagor (borrower/homeowner) is in default. Once the lender has exhausted its attempts to resolve the default with the homeowner, the next step is to contact an attorney to pursue court action. The attorney contacts the mortgagor to try to resolve the default. If the mortgagor is unable to pay off the default, the attorney files a lis pendens (lawsuit pending) with the court. The lis pendens gives notice to the public that a pending action has been filed against the mortgagor. The purpose of the action is to provide evidence of a default and get the court’s approval to initiate foreclosure.
Non-judicial foreclosures are based on deeds of trust that contain the power of sale clause. The clause enables the trustee to initiate a mortgage foreclosure sale without having to go to court. The trustee is typically required to issue a notice of default and notify the trustor (borrower/homeowner) accordingly about the default status. If the trustor does not respond, the trustee then initiates the steps for conducting the mortgage foreclosure sale of the home.
This foreclosure process allows for three opportunities for finding bargains on foreclosure homes.
Timeline for Foreclosure
Step 1: Pre-Foreclosure
Property owners who are late in their mortgage payments will receive a Notice of Default from their lender. Notices of default are filed with the local records authority. A Lis Pendens filing may also be filed to notify any other lien holders. The Notice of Default provides instructions to the homeowner on the amount they are required to pay and how much time they have to pay. If the homeowner pays according to these instructions, the foreclosure process is ended.
Step 2: Auction
If the loan is not reinstated by the end of the pre-foreclosure period, the property will be sold at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers the lender a way to quickly liquidate the property. The lender typically sets a minimum bid at foreclosure auction equal to the amount owed on the property plus fees and various costs to the lender.
Step 3: Bank Owned (REO)
Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.
Exits from the Foreclosure Process
Properties may exit the foreclosure process in several ways. Pre-foreclosures may exit the process prior to the Foreclosure Auction in one of several ways:
a) Owner catches up on missed mortgage payments
b) Owner gets a loan modification to reduce their mortgage payments
c) Owner sells the property for less than what is owed on the loan (short sale)
d) Deed in lieu of foreclosure
Properties scheduled for a public foreclosure auction exit the foreclosure process by being sold to a third party buyer at auction.
Investors seek returns in several ways: buying cheap and flipping, making improvements, or renting for longer term appreciation. Investors may buy homes directly from homeowners, at auction, or from lenders.
Properties in the foreclosure process must ultimately be bought or rented by ordinary consumers who plan to live in them. This may seem obvious, but the consumer is an extremely important piece of the foreclosure puzzle. Consumers may pay significantly more or nearly nothing for a property based on a myriad of consumer preferences. Consumers may prefer to live near good schools or universities, away from high crime areas, away from hazardous waste sites, etc.
Judicial vs. Non-Judicial Foreclosure Process
In certain status, the foreclosure process no longer requires involvement of the court system. These states are referred to as “non-judicial”. See a comparison of foreclosure laws by state at Foreclosure Laws.
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