What Is Foreclosure?

Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Typically, default is triggered when a borrower misses a specific number of monthly payments, but it can also happen when the borrower fails to meet other terms in the mortgage document.

Key Takeaways

  • Foreclosure is a legal process that allows lenders to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property.
  • The foreclosure process varies by state, but in general, lenders try to work with borrowers to get them caught up on payments and avoid foreclosure.
  • The average number of days for the foreclosure process is 673; however, the timeline varies greatly by state.

Understanding Foreclosure

The foreclosure process derives its legal basis from a mortgage or deed of trust contract, which gives the lender the right to use a property as collateral in case the borrower fails to uphold the terms of the mortgage document.

Although the process varies by state, the foreclosure process generally begins when a borrower defaults or misses聽at least one mortgage payment. The lender then sends a missed payment notice that indicates they haven't received that month's payment.

If the borrower misses two payments, the lender sends a demand letter. While this is more serious than a missed payment notice, the lender may still be willing to make arrangements for the borrower to catch up on the missed payments.

The lender sends a notice of default after 90 days of missed payments. The loan is handed over to the lender's foreclosure department, and the borrower typically has another 90 days to settle the payments and reinstate the loan (this is called the reinstatement period).

At the end of the reinstatement period, the lender will begin to foreclose if the homeowner has not made up the missed payments.

If your mortgage is backed by the federal government and you are behind on your mortgage because of a COVID-19-related financial hardship, you may be eligible to suspend payments for as long as 12 months with no late fees.

The Foreclosure Process聽Varies聽by State

Each state has laws that govern the foreclosure process, including the notices a lender must post publicly, the homeowner's options for bringing the loan current and avoiding foreclosure, and the timeline and process for selling the property.

A foreclosure鈥攁s in the actual act of a lender seizing a property鈥攊s typically the final step after a lengthy pre-foreclosure process. Before foreclosure, the lender may offer several alternatives to avoid foreclosure, many of which can mediate a foreclosure's negative consequences for both the buyer and the seller.

In 22 states鈥攊ncluding Florida, Illinois, and New York鈥judicial foreclosure is the norm. This is where the lender must go through the courts to get permission to foreclose by proving the borrower is delinquent. If the foreclosure is approved, the local sheriff auctions the property to the highest bidder to try to recoup what the bank is owed, or the bank becomes the owner and sells the property through the traditional route to recoup its losses.

The other 28 states鈥攊ncluding Arizona, California, Georgia, and Texas鈥攑rimarily use non-judicial foreclosure, also called the聽power of sale. This type of foreclosure tends to be faster than a judicial foreclosure, and it does not go through the courts unless the homeowner sues the lender.

How Long Does Foreclosure Take?

Properties foreclosed in the first quarter of 2020 (the most recent data available) had spent an average of 673 days in the foreclosure process, according to the U.S. Foreclosure Market Report from ATTOM Data Solutions, a property data provider. That's down 19% from an average of 834 days for properties foreclosed in the third quarter of 2019.

The average number of days varies by state because of varying laws and foreclosure timelines. The states with the longest average number of days for properties foreclosed in the first quarter of 2020 were:

  • Hawaii (1,673 days)
  • Indiana (1,361 days)
  • Louisiana (1,243 days)
  • New York (1,226 days)
  • Florida (1,022 days)

States with the shortest average times to foreclose during the same period were:

  • Arkansas (157 days)
  • Wyoming (172 days)
  • New Hampshire (184 days)
  • Virginia (190 days)
  • Minnesota (202 days)

The graph below shows the quarterly average days to foreclosure since the first quarter of 2007.

Average days to complete foreclosure
Image source: ATTOM Data Solutions.

Can You Avoid Foreclosure?

Even if a borrower has missed a payment or two, there may still be ways to avoid foreclosure. Some alternatives include:

  • Reinstatement: During the reinstatement period, the borrower can pay back what he or she owes (including missed payments, interest, and any penalties) before a specific date to get back on track with the mortgage.
  • Short refinance: This is a type of refinancing where the new loan amount is less than the outstanding balance, and the lender may forgive the difference to help the borrower avoid foreclosure.
  • Special forbearance: If the borrower has a temporary financial hardship鈥攕uch as medical bills or a decrease in income鈥攖he lender may agree to reduce or suspend payments for a set amount of time.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the or with the (HUD).

Consequences of Foreclosure

If a property fails to sell at a foreclosure auction or if it otherwise never went through one, lenders鈥攐ften banks鈥攖ypically take ownership of the property and may add it to an accumulated portfolio of foreclosed properties, also called聽real-estate owned (REO).

Foreclosed properties are typically easily accessible on banks' websites. Such properties can be attractive to real estate investors because in some cases, banks sell them at a discount to their market value, which of course, in turn, negatively affects the lender.

For the borrower, a foreclosure appears on a credit report within a month or two鈥攁nd stays there for seven years from the date of the first missed payment. After seven years, the foreclosure is deleted from the borrower's credit report.