How a Mortgage Works

When you buy expensive property, such as a home, you can pay a small percentage of the price up front, usually anywhere from 3% to 20% of the price, with a down payment, and borrow the rest of the money, to be repaid in future years with a mortgage.1

The money borrowed can be hundreds of thousands of dollars, and as part of the loan agreement, you will agree that the house will serve as collateral for the loan.2 If you stop making payments, the lender can foreclose on the property—that is, repossess it, evict you, and sell the property in order to recover the funds they lent you that you cannot repay.3 To secure this right, the lender places a lien on your property, which is the lender's legal claim to your property in the event you fail to meet the obligations of the mortgage.

How Foreclosures Work

Foreclosure is generally a slow process. If you make one payment a few days or weeks late, you’re probably not facing eviction. However, you may face late fees in as little as 10 to 15 days.4 That's why it’s important to communicate with your lender as early as possible if you’ve fallen on hard times or expect to in the near future—it might not be too late to avoid foreclosure.

The foreclosure process itself varies from lender to lender and laws are different in each state; however, the description below is a rough overview of what you might experience.3 The entire process could take several months at a minimum.

Notices Start Arriving

You will generally start to receive communications as soon as you miss one payment, and those communications might include a notice of intent to move forward with the foreclosure process.

In general, lenders initiate foreclosure proceedings three to six months after you miss your first mortgage payment. Once you’ve missed payments for three months, you may be given a "Demand Letter" or "Notice to Accelerate" requesting payment within 30 days.

If, by the end of the fourth month of missed payments, you still have not made the payment, many lenders will consider your loan to be in default and will refer you to the lender's attorney.5 This is when things get critical. Read all of your notices and agreements carefully and speak with an attorney or a Department of Housing and Urban Development (HUD) housing counselor to stay in the know.

A Judicial or Nonjudicial Foreclosure Ensues

There are two types of foreclosures, judicial and nonjudicial, and it's up to each U.S. state which to use.

In judicial states, your lender must bring legal action against you in the courts to foreclose. This process takes a long time, as you often have 30 to 90 days in between each court event.

In nonjudicial states, lenders can foreclose based on the "power of sale" clause in the agreements you’ve signed with them, and a judge is not involved.3 As you might imagine, things move much faster in nonjudicial states. But in either type of foreclosure, you will be given written notice to make payment followed by a "Notice of Default" and a "Notice of Sale."

Whichever process is in effect, you can fight the foreclosure in court. In a judicial state, you’ll generally be served with a summons, whereas in a nonjudicial state, you’ll need to bring legal action against your lender to stop the foreclosure process.7 Speak with a local attorney for more details.

You Can Stop the Process

In certain states, lenders are required to offer borrowers the option to reinstate the loan and stop the foreclosure process. Lenders might say that you can reinstate the loan anytime after the "Notice of Sale" up until the foreclosure date (the sale date) and stay in the home if you make all (or a substantial portion) of your missed payments and cover the legal fees and penalties charged so far. You might also have an opportunity to pay off the loan in its entirety, but this may only be feasible if you manage to refinance the home or find a substantial source of money.8

Auction and Eventual Eviction

If you’re unable to prevent foreclosure, the property will be made available to the highest bidder at an auction that either the court or a local sheriff's office runs. If nobody else buys the home (which is common), ownership goes to the lender. At that point, if you’re still in the house (and haven't made arrangements to protect the house), you face the possibility of eviction. Local laws dictate how long you can remain in the house after foreclosure, and you should receive a notice informing you of how long you can stay. Ask your former lender about any “cash for keys” incentives, which can help ease the transition to new housing (assuming that you’re ready to move quickly).9

Get a Second Chance Through a Redemption

Many states offer what is known as redemption, a period after the foreclosure sale occurs when you can still reclaim your home. The "Notice of Sale" will generally inform you about the redemption period, and timeframes vary by state. You generally must be willing to pay the loan balance that you owe and any costs associated with the foreclosure process to reclaim in the home.10

Consequences of a Foreclosure

The main outcome of foreclosure is, of course, the forced sale and eviction from your home. You’ll need to find another place to live, and the process could be extremely stressful for you and your family.

Foreclosures are expensive, too. As you stop making payments, your lender may charge late fees, and you might pay legal fees to fight foreclosure.5 Any fees added to your account will increase your debt to the lender, and you might still owe money after your home is taken and sold if the sale proceeds are not sufficient (known as a "deficiency").11

A foreclosure will also hurt your credit scores. Your credit reports will show the foreclosure starting a month or two after the lender initiates foreclosure proceedings, and it will stay on the report for seven years. You’ll have a hard time borrowing to buy another home (although you might be able to get certain government loans within one to two years), and you’ll also have difficulty getting affordable loans of any kind.12

How To Avoid a Foreclosure

Foreclosure is time consuming and expensive for lenders (although they can try to pass along some of those fees to you), and something they'd like to avoid, if possible. Knowing this, it's important to try to work with your lender to try to prevent foreclosure:

• Keep in touch with your lender. Get in touch before you start missing payments and ask if anything can be done. And if you start missing payments, don’t ignore communication from your lender—you’ll receive important notices telling you where you are in the process and what rights and options you still have. Speak with a local real estate attorney or HUD housing counselor to understand what’s going on.
• Explore alternatives to keep your home. If you know that you won’t be able to make your payments, find out what options are available to you. You might be able to get help through government foreclosure-avoidance programs.13 Some lenders offer similar programs to those willing to fill out a mortgage assistance application.14 Your lender might even offer a loan modification that would make your loan more affordable. Or, you might be able to work out a simple payment plan with your lender if you just need relief for a brief period (if you’re in between jobs, or have surprise medical expenses, for example).
• Look into alternatives for leaving your home. Foreclosure is a long, unpleasant, expensive process that damages your credit. If you’re simply ready to move on (but want to at least try to minimize the damage), see if your lender will agree to a short sale, which allows you to sell the house and use the proceeds to pay off your lender even if the loan hasn't been completely repaid and the price of the home is less than what you owe on the mortgage. However, you may still have to pay the deficiency unless you have it waived.15 If that doesn’t work, another less attractive option is a deed in lieu of foreclosure, which allows you to reduce or even eliminate your mortgage balance in exchange for turning over your property to the lender.16
• Consider bankruptcy. Filing for bankruptcy might temporarily halt a foreclosure. The issues are complex, so speak with a local attorney to get accurate information that’s tailored to your situation and your state of residence.
• Avoid scams. Because you’re in a desperate situation, you’re a target for con artists. Be wary of foreclosure rescue scams, such as phony credit counselors or individuals who ask you to sign over the deed to your home, and be selective about whom you ask for help. Start seeking help from HUD counseling agencies and other reputable local agencies.

Frequently Asked Questions (FAQs)