What are the Steps in Foreclosure?

The foreclosure process differs by state, but we can take a look at the general steps that are taken. If you're faced with foreclosure, it's important that you research your state's laws and practices.

Foreclosure proceedings can begin after a single missed payment, but it isn't very likely. Most banks and lenders have a grace period for late payments, usually with a fee added on. It typically takes being a full 30 days late for the alarm bells to go off. After the second missed payment, you'll be getting some phone calls. Many lenders will only accept both late payments to bring the loan current. They also may refuse any partial payments.

Once you fall three months behind, things get serious. This is typically when most lenders will begin the foreclosure process in one of two ways: judicial sale, which requires that the process go through the court system, or power of sale, which can be carried out entirely ­by the mortgage holder.

All states allow judicial sale, while only 29 allow power of sale. If your state allows power of sale, the loan papers will usually have a clause that says this method will be used. Power of sale is typically faster than the judicial route. Let's look at both methods.

Judicial sale:

The mortgage lender will file suit with the court system.
You'll receive a letter from the court demanding payment.
Typically, you'll have 30 days to respond with payment to avoid foreclosure.
At the end of the payment period, a judgment will be entered and the lender can request sale of the property by auction.
The auction is carried out by the sheriff's office, usually several months after the judgment.
Once the property is sold, you're served with an eviction notice by the sheriff's office, and you must vacate your former home immediately.

Power of sale:

The mortgage lender will serve you with papers demanding payment.
After an established waiting period, a deed of trust is drawn up that temporarily conveys the property to a trustee.
The trustee will sell the house at public auction for the lender.
Many times, these foreclosures are subject to judicial review to make sure everything was carried out legally.
There is usually a requirement for the lender to post a public notice of sale for the auction.

Both types of foreclosure require that any other involved parties be notified of the proceedings. For instance, if the homeowner took out another loan against the house with a third party, that lender must be contacted and its loan amount must be paid from the auction's proceeds. If the third-party lender isn't paid, it can apply the mortgage to the new property owner. Many times, the lender will actually buy the property back and attempt to sell it through the real estate market at a later date.

There can also be deficiency judgments made against the borrower if the sale of the property doesn't satisfy the amount of the loan. The entire difference between the two can be required, although some states only require that difference between the fair value of the property and the loan amount be paid.

There's one more type of foreclosure that's almost completely obsolete, called strict foreclosure. In these cases, once judgment is made on the lawsuit, the property is automatically assumed by the mortgage holder. Only Connecticut and Vermont still allow this practice
[source: Realty Trac].

If you have missed one or two payments you are not in immediate danger of loosing your home, but you need to know what happens at the Bank level before it goes too far. Most banks will honor what is called “forbearance”. Essentially the banks will allow you to miss a payment or two due to an unforeseen hiccup in your financial situation. What they will offer in these situations is to add the missed payments to the back of your loan and re-instate your payment schedule. This is not a true loan modification; it is merely a patch to help you get back on your feet. If you have a good rate and decent terms, this is the easiest resolution to your situation. You can contact your Loss Mitigation department of your lender and request this option. In today’s economy more banks are asking for you to fill out a work out sheet for these forbearances as a standard request. If your bank asks you for this it is no different than a loan modification request.

If you have been issued a Notice of Default then chances are you have missed more than three payments. Banks will not issue you these unless you are a minimum of 90 days late on your mortgage payment. You again are not in immediate danger of loosing your home, but you are getting dangerously close to it, and you MUST get a plan of action formulated if you want to save your home. Banks have to follow certain protocols, which you can use to your advantage if you are in a situation where you need more time. If this is your situation visit the section on our site titled I just need more time to get back on my feet, what do I do? This will show you ways get you the time you may need to straighten your situation out. These are last resorts and are not meant to be used to get you out of making your mortgage payments; the sooner you resolve your situation the better you will sleep at night.

Understand that even after you have been delivered with a Notice of Default, the bank has to wait another 30 days before they can file for a foreclosure. It is considered a reasonable time period for you to re-instate the debt. Don’t be alarmed if you start seeing photographers at your front lawn taking pictures or massagers delivering you stick it notes asking you to contact your bank. This is normal, and necessary for the bank to evaluate the condition of your property. The truth of the matter frankly, is that the courts are inundated with foreclosures and chances are a trustee sale will not be set on your home for 3-4 months after you have been notified. So again, there is time, but time is running out. But you may need some extra help from a Hud approved counseling agency in your state, HUD and NACA or a good advocacy group to delay a foreclosure until a loan modification can be reached. Their services are free, and with their help you can save lots of money and still be able to modify your loan without paying through the nose for it via a third party who promised you the stars and the moon. There is never a guarantee, just remember this. The best modifications are court ordered.

Temporary Agreement If a bank decides they will work with you, they will send you a temporary agreement that outlines a reduced payment with typically three payment stubs. Understand this is not the bank’s agreed modification, it is kinda like a rental agreement of sorts to keep you in the home while you work something else out. There is usually a disclosure letter that comes with this. One of the things that frustrated many of us over the last several years was the back end balloon that lenders were tacking on. Essentially what they were doing was complying with Obama’s and Hamp guidelines up front, they were placing interest and attorney fees and back payments into a second. This second earned compounded interest essentially forever. So what people were getting was payments they could afford, but a debt that was specifically geared on eating away all equity that could ever be earned in the home, after the recovery.

The other thing to watch for in a modification is if they intend to sell off you loan after they modify it. The new lender who assumes the “bad debt” are taking the debt based upon the original note and not your modified note. Many people lost their homes when the new lender took the loan over and foreclosed. Anything you do in a modification with you lender is only a temporary solution. Only court ordered restructures like Chapter 13 Bankruptcy will stick. We are not saying not to do it, just understand your situation and your rights within. NACA has made strides in helping homeowners over the last several years so working with a advocacy group has its advantages over trying to modify your loan directly with the banks.

When you are given a Foreclosure notice, that is your date your property goes up for sale. Legally you have up to 5 days before the sale to cure your debt or dispute the claim. The banks often discount the note to make it appealing for an investor to pick up the property. Investors pay by cash or certified bank checks from a cash account. Once the investor wins the bid and delivers that check the property is no longer yours. In your foreclosure notice you are given a time line of how long you can stay in your home after the sale. It varies from 20-30 days state to state, longer if you have a renter in the property. If you do not vacate, a sheriff will be brought to the property to evict you and remove you and your belongings from the property.

Most advocacy groups need at least 7-10 days before the foreclosure to request an extension of the foreclosure. NACA is extremely good at this, and are a great home save site if you need to get delay a foreclosure. You can still request a loan modification with your bank any time before it actually forecloses, but get strong advocacy groups working with you. Banks are less likely to ignore your request if they know you are teaming up with a these non-profits who work closely with Federal agencies. The last thing they want is to explain why they did not help you to a Federal agency especially under Obama’s Home Save Programs. However they will only ask you the loan modification questions that are on a lenders work out sheet. They will not tell you how to use your information to get you the best loan modification for your situation. Even if you think you cannot qualify, read though What is Obama’s Loan Modification Plan and how does it affect me? You may be surprised what you find there.

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