Mortgage
Foreclosure
Foreclosure summary:
Foreclosure can take many months, and you have options to help prevent or delay foreclosure.
If you're about to miss a mortgage payment, talk to your lender and find out if you can get a payment pause, loan modification, or other help.
Foreclosures stay on your credit reports for seven years and can seriously damage your credit scores.
Foreclosure Definition and Meaning
Foreclosure is a legal process where a lender takes possession of a home or other property because the borrower didn’t repay the loan as agreed. Debt relief programs can’t be used to fight foreclosure. That’s because debt settlement programs are for unsecured debts (like credit cards), while foreclosure only affects secured debts like home mortgages.
If you fall behind on mortgage payments and are facing foreclosure, you still have legal rights and options. Understanding foreclosure could help you get in the best financial position to deal with the situation.
Key Features of Foreclosure
Foreclosure is a legal process that can take several months to over a year. Because foreclosure involves removing someone from a home, people who are facing foreclosure have certain legal protections and rights.
Written notice
If you miss one mortgage payment, your lender will likely reach out with an initial communication. Lenders must contact you in writing to tell you that your mortgage is 30 days (or more) past due. They must give you information on how to get current on your mortgage.
Court process
Banks can't just take your house without legal permission. Foreclosure typically requires the involvement of a judge. And you have the right to hire an attorney to help you with the foreclosure process.
Different rules in different states
States have different laws governing foreclosure. For example, all states allow for judicial foreclosure. That’s where lenders file lawsuits against the borrower and ask a judge to approve the foreclosure. Some states also allow non-judicial foreclosure (or power of sale foreclosure). In this type of foreclosure, foreclosure can happen after a waiting period without a judge’s approval.
Long-term process
Foreclosure doesn’t happen overnight. If you become 30 days, 60 days, or 90 days overdue on your mortgage, you should expect your lender to contact you in writing and by phone. They might even pin a brightly colored notice to your front door.
You might be able to delay or prevent foreclosure by working with your lender. Some lenders might help you get debt forbearance or loan modification, apply for mortgage refinancing, or set up a repayment plan.
Credit score impact
Foreclosure is a significant negative credit event, and is likely to hurt your credit score. Foreclosures stay on your credit reports for seven years.
Foreclosure: Comprehensive Breakdown
If you’re falling behind on your mortgage payments, there's help available, and you have options. Here’s what to consider.
Lenders don’t want to foreclose
The foreclosure process takes time and costs lenders money. It’s better for banks if you can pay your bills and stay in your home. Lenders may work with you to find solutions and help you get caught up on your mortgage.
Talk to your lender early and often
As soon as you feel as if you might miss your first mortgage payment, talk to your lender. Tell them about any financial setbacks like a lost job or medical crisis. If you talk to your lender early and stay in communication often, you might be more likely to get help and avoid foreclosure.
Ask for forbearance or loan modification
Some lenders can offer forbearance on your mortgage that lets you skip a few payments, while still owing the full amount of the debt plus interest and fees. Lenders might also offer a loan modification to extend the term of your loan, or other changes to help make your payments more affordable.
Foreclosure FAQs
Do I still owe money after foreclosure?
In some situations, yes, it's possible to owe money after foreclosure. After a lender forecloses on your home, they will then sell the home at auction. If the home doesn’t sell for enough money to pay off what you owe, the lender might be allowed to sue you for the remaining balance. This is called a deficiency judgment and it is legal in some states. The deficiency balance is an unsecured debt because the real estate is already gone, and it may be a candidate for debt settlement.
Another way to owe money after foreclosure is if the lender forgives the remaining balance and you get a tax bill. Forgiven debt is considered taxable income unless you’re insolvent. Insolvent means your debts are worth more than the value of the things you own. So even if you don’t receive a deficiency judgment, if you’re solvent, you might owe extra taxes after foreclosure.
Do you get any money if your house is foreclosed?
If you have enough home equity after the mortgage is paid off, you could get money back after a foreclosure.
For example, let’s say that your home is worth $300,000 and you have a mortgage balance of $150,000. That means your home equity is $150,000. But then you lose your job, fall behind on payments, and you lose your home to foreclosure. If the lender sells your former home for $250,000 at auction, you’d receive $100,000, minus fees and penalties.
Although this is possible, it’s not typical. Usually, it’s easier and cheaper for a struggling borrower to sell the home and pay off the mortgage rather than let the bank foreclose on the home.
After foreclosure, can I ever buy a home again?
Even with a foreclosure on your credit report, it’s still possible to qualify for a mortgage and buy a home again. The usual waiting period for a new mortgage after foreclosure is seven years. The waiting period is shortened to three years if your foreclosure was due to extenuating circumstances such as divorce, job loss, or medical bills. In the meantime, it’s possible to work on your credit score by paying all of your bills on time and keeping your credit card debt low.
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