How Does Foreclosure Work?

Get an overview of how mortgages work, steps in a foreclosure, and what happens after a foreclosure.

When you take out a loan from a bank or mortgage company to buy a home, you'll most likely sign many documents, including a mortgage (or deed of trust) and promissory note. In this paperwork, you'll promise to make the payments according to the payment schedule.

But if you fail to make payments, the lender can go through a legal process called "foreclosure" to sell your home to a new owner. Some states require the process to go through court (judicial foreclosures). In other states, the foreclosing party (the "lender") can use out-of-court procedures (nonjudicial foreclosures) or it may opt to use the court system to foreclose.

If a third party is the highest bidder at the foreclosure auction, the lender will apply the proceeds from the foreclosure sale to your outstanding debt. If no one else bids on the home at the sale, the lender gets the property.

How Do Mortgages Work?

Because buying a home involves a large sum of money, it's common for a buyer to finance the purchase with a loan (often called a "mortgage") rather than coming up with all the cash upfront. The main parties to the transaction are the borrower and the lender.

The borrower is the person who borrows money and pledges the property as security to the lender for the loan. The borrower is sometimes called the "mortgagor." The lender, or "mortgagee," provides the loan.

What Are the Main Documents That Make Up a Mortgage Loan?

The borrower usually signs several documents as part of the loan transaction, including a promissory note and a mortgage (or deed of trust or a similar instrument).

  • Promissory notes. A "promissory note" is a document that contains a borrower's promise to repay the amount borrowed and the terms for repayment, like the interest rate. But the note doesn't set out any consequences of non-payment other than late charges—that's the function of the mortgage or deed of trust.
  • Mortgages. Even though people typically refer to a home loan as a "mortgage," a mortgage is actually the contract that secures the loan. It gives the lender the right to foreclose if the borrower doesn't make the loan payments.
  • Deeds of trust. In states that don't use mortgages to secure the loan, the borrower signs a different security instrument, frequently called a "deed of trust."
  • Other security instruments. And a few states use other documents for secured transactions, like a security deed.

When the lender records the mortgage, deed of trust, or other security instrument in the land records, it creates a lien on the home. If the borrower breaches the loan contract, like failing to make payments, the lender can foreclose.

Servicers and Investors

A "servicer" manages the loan account. In some cases, the loan owner is also the servicer. Other times, the loan owner sells the servicing rights to a third party. That company then handles the loan account; it processes monthly payments and oversees collection activities if the borrower doesn't make the payments.

Many times, after originating the loan, the original lender won't keep it. Instead, the lender sells the loan to bring in more money to keep lending to new borrowers. Promissory notes and mortgages/deeds of trust are transferable.

When a loan changes hands, the promissory note is endorsed (signed over) to the new owner. The seller documents the transfer by recording an assignment in the land records. The new owner is called an "investor." Lenders typically sell the loans they originate to other banks or investors on the secondary mortgage market.

Preforeclosure Notices and Requirements

Most standard mortgages and deeds of trust require the lender to send a "breach" letter before starting a foreclosure. The letter ordinarily gives the borrower 30 days to catch up on the overdue amounts to avoid losing the property.

Some states also have a law requiring the lender or servicer to send some kind of notice before a foreclosure starts. While the type and content of these notices vary from state to state, they usually serve the same purpose as a breach letter: they tell the borrower to get current or a foreclosure will start.

Preforeclosure notices also often provide information about loss mitigation options (ways to avoid foreclosure), like loan modifications and short sales.

Federal Foreclosure Laws

Federal mortgage servicing laws also provide preforeclosure protections to homeowners, including:

  • The servicer has to try to contact you to discuss loss mitigation options no later than 36 days after you miss a payment and again within 36 days after each missed payment, even if the servicer previously contacted you. (12 C.F.R. § 1024.39).
  • The servicer has to send you a written notice no later than the 45th day after a missed payment and once every 180 days after that for as long as the loan is delinquent to tell you about loss mitigation options. (12 C.F.R. § 1024.39).
  • In most cases, the foreclosure can't officially start until you're more than 120 days delinquent. (12 C.F.R. § 1024.41).

What Happens During a Foreclosure?

Again, state law determines foreclosure procedures. Generally, the process will be judicial or nonjudicial.

What Is a Judicial Foreclosure?

Approximately half of the states require the lender to file a lawsuit in court to foreclose. You'll be served a copy of the suit (called a "complaint" or "petition"), along with a summons, telling you about the foreclosure. If you don't file an answer with the court, the lender will ask the court for, and probably get, a default judgment, which will allow it to hold a foreclosure sale.

However, if you respond to the lawsuit, the case will go through litigation. To protect your rights, you have to respond to the suit within the time afforded by your state, raising any defenses, affirmative defenses, and counterclaims in your answer.

If the lender wins the case, the judge will enter a judgment, allowing the lender to sell the property. This process, called a "judicial foreclosure," usually takes at least several months and as long as a few years in some places.

What Is a Nonjudicial Foreclosure?

In a nonjudicial foreclosure, the lender usually has to provide notice about the foreclosure in one or more of the following ways:

  • through the mail
  • by publishing sale information in a newspaper, or
  • by posting a notice on the property.

Typically, the lender must also record a notice in the county records. Nonjudicial foreclosures generally take much less time than judicial ones, taking only a few weeks or months to complete.

You must file a lawsuit if you have one or more defenses and want to fight a nonjudicial foreclosure.

What Is Foreclosure Mediation?

Some states, counties, and cities give homeowners the right to participate in foreclosure mediation. Attending foreclosure mediation doesn't guarantee that you'll be able to keep your home. But it does boost your chances of stopping the foreclosure process.

And even if you can't work out a foreclosure avoidance option, you'll probably at least buy yourself some extra time to live in the home without making any payments.

How Foreclosure Mediation Works

Mediation consists of one or more meetings with the foreclosing lender or the lender's representative, such as the loan servicer, and a neutral mediator to try to find an alternative other than foreclosure.

During mediation, the parties discuss the borrower's financial situation and consider different options to prevent a foreclosure, like by completing a loan modification, short sale, deed in lieu of foreclosure, repayment plan, or something else.

Foreclosure procedures are usually put on hold while you participate in mediation.

Where Is Foreclosure Mediation Available?

Many courts and state legislatures have implemented foreclosure mediation programs for residential homeowners. Mediation programs came about in three ways: through new state laws, judicial orders, or administrative orders from local courts.

So, foreclosure mediation isn't available everywhere. Statewide programs exist in some places; in others, mediation is available only in specific counties or particular cities. Other localities don't offer foreclosure mediation at all.

If you're already in foreclosure and mediation is available, you'll probably get a notice about its availability along with the foreclosure paperwork. Otherwise, you can talk to a lawyer to find out if foreclosure mediation is available in your area or review your state's statutes to see if the legislature passed a foreclosure mediation law. However, keep in mind that your state's laws won't mention any judicial or administrative orders about foreclosure mediation programs.

Foreclosure Mediation Process

If your state, county, or city offers a foreclosure mediation program, your lender must follow the program guidelines. Mediation processes vary widely from place to place, but the procedures usually begin when the lender starts a foreclosure.

When foreclosure mediation is available, homeowners typically get the following information along with notice of the foreclosure:

  • materials about the mediation program
  • details on how to opt into the program if enrollment isn't automatic, and
  • contact information for HUD-approved housing counselors and low-cost legal services available in the state.

Some programs require the lender to participate if the homeowner opts into the program. Other programs require participation, even if the homeowner doesn't request it.

Should I Go to Foreclosure Mediation?

If your state, county, or city offers foreclosure mediation, you should strongly consider participating. While foreclosure mediation programs don't make the lender give you a loss mitigation option, according to one study, people who participate in mediation are almost twice as likely to prevent a foreclosure as those who didn't.

If nothing else, you might get some extra time to stay in the home because foreclosure typically stops during the mediation. During this time, you can save some money because you'll be living in the property payment-free.

How Foreclosure Sales Work

For both judicial and nonjudicial foreclosures, the process ends with a foreclosure sale. The sale is typically an auction where the public and foreclosing lender may bid on the property. (However, in two states, Connecticut and Vermont, the lender can use what's called a "strict foreclosure" process. In a strict foreclosure, the lender files a lawsuit, but the court doesn't order a foreclosure sale. Instead, the court directly transfers the property title to the lender.)

The lender normally makes a bid on the property using what's called a "credit bid" rather than bidding cash. The lender gets a credit up to the amount of the borrower's debt.

The highest bidder at the sale becomes the new owner of the property.

What Happens After a Foreclosure

Depending on state law, you might be able to remain in the property, even after the sale, until the redemption period expires or some other action, like sale ratification, happens.

You'll be evicted if you don't move after the foreclosure sale or the extra time expires. In some cases, the lender includes an eviction as part of a judicial foreclosure. Other times, the lender has to file an eviction lawsuit to evict. A separate eviction lawsuit is typically required after a nonjudicial foreclosure.

Deficiency Judgments Following Foreclosures

If the foreclosure sale doesn't bring in enough money to fully repay what you owe the lender, the difference between the sale price and the total debt is called a "deficiency."

In some states, the foreclosing lender can get a personal judgment, called a "deficiency judgment," against you for the deficiency amount. Other states prohibit deficiency judgments under certain circumstances.

How to Delay or Stop an Imminent Foreclosure

If you've fallen behind on your mortgage payments and find yourself facing imminent foreclosure, it could still be possible to save your home. And if saving your home is no longer an option, you might at least be able to delay the foreclosure process and gain more time to live in the property without making any payments.

File for Bankruptcy Protection to Avoid Foreclosure

If a foreclosure sale is scheduled to take place in a matter of days, you can stop the foreclosure in its tracks by filing for bankruptcy. Upon filing, something called an "automatic stay" goes into place.

The stay immediately puts the foreclosure on hold during the bankruptcy process. The lender may try to get around the automatic stay by filing a motion to lift the stay and asking permission from the court to continue with the foreclosure proceeding. But even if the lender's motion is granted, the foreclosure will still probably be delayed for at least one or two months, during which time you can continue trying to work out a foreclosure alternative.

If you want to save your home, you might be able to do so by filing Chapter 13 bankruptcy. If you can't make your mortgage payments and keeping your home isn't an option, Chapter 7 bankruptcy might still be able to help you make the most of the foreclosure.

Chapter 13 Bankruptcy

If you're facing foreclosure, a Chapter 13 bankruptcy allows you to make up the mortgage arrears through your plan (something you can't do in a Chapter 7 bankruptcy). Chapter 13 can also potentially help you save your home because it will reduce the amount of debt you will have to repay, thus freeing up your money to put toward paying your mortgage.

With a Chapter 13 bankruptcy, you must propose a repayment plan. If the court approves your plan, and you can stick to the plan for the required three to five years, then your remaining unsecured debt will be discharged, and you'll be able to keep your home.

Chapter 7 Bankruptcy

If you're in arrears and facing foreclosure, a Chapter 7 bankruptcy doesn't allow you to catch up. So, unless you can negotiate something with your lender independently from the bankruptcy, you'll most likely lose your home.

But filing for Chapter 7 bankruptcy can still provide benefits. Perhaps the biggest benefit is the delay in foreclosure proceedings. A delay will allow you more time in your home and give you the opportunity to save money because you won't be making any mortgage payments during the delay. You'll also have time to try to work out a foreclosure alternative with your lender.

Chapter 7 bankruptcy will also eliminate your personal liability for your mortgage debt; you'll probably still lose your home, but you won't be liable for any deficiency remaining after the foreclosure.

Risks of Filing for Bankruptcy

Filing for bankruptcy is a serious step and should be carefully considered. Most significantly, a bankruptcy filing can result in the loss of other valuable property and damage your credit scores.

Keep in mind that foreclosure will also damage your credit scores, and the benefits of filing bankruptcy (the discharge of your mortgage and unsecured debts) might outweigh any hit you might experience to your credit.

Sue Your Lender

If you're facing a judicial foreclosure, by the time of your scheduled foreclosure sale, you technically already had your chance to fight the foreclosure in court. But if you're facing a nonjudicial foreclosure (a foreclosure that doesn't go through the court), you might be able to slow or stop your foreclosure at the last minute by filing a lawsuit.

However, you can't stop the process just because you want more time to live in the home. You must have some legal reason or valid defense that's based in good faith for fighting the foreclosure.

To succeed in your suit against your lender, you'll need to prove to the satisfaction of the court that the foreclosure shouldn't take place because, for example:

  • the party foreclosing isn't the party that owns the mortgage note
  • the lender (or servicer) didn't take all of the legally required steps in the foreclosure process, or
  • the lender (or servicer) made some other serious error.

The downside to suing your lender is that a lawsuit can be costly. If a court doesn't believe your allegations against the lender, your lawsuit will delay rather than prevent your foreclosure. But even delaying your foreclosure might incentivize your lender to settle with you.

Apply for Loss Mitigation

While you can't wait until the last minute before a foreclosure sale for this option to help, you might be about to stop or delay a foreclosure by applying for loss mitigation.

Under federal law, if you send the servicer (the company that handles the loan account on behalf of the lender) a complete loss mitigation application more than 37 days before a foreclosure sale, the servicer can't ask a court for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until:

  • it tells you that you don't qualify for a loss mitigation option (and your appeal, if you get the right to appeal, has been exhausted)
  • you turn down all loss mitigation offers, or
  • you don't stick to the loss mitigation agreement, like if you fail to make payments on a trial modification.

Applying for loss mitigation probably won't get you a lot of extra time unless you can work out a loan modification.

In most instances, the servicer has to decide on your application within 30 days and can proceed with the foreclosure after any of the three above conditions is satisfied. Also, the servicer doesn't have to review multiple loss mitigation applications from you. But if you get current on the loan after submitting an application and later submit another application, the servicer has to review it.

A few states also have laws that prevent a foreclosure from going ahead if the borrower submits a loss mitigation application, some of which are more generous than federal law.

Is There a Statute of Limitations For Home Foreclosure?

A "statute of limitations" sets a time limit for initiating a legal claim. All types of legal actions, including foreclosure, have a statute of limitations. Generally, the statute of limitations for foreclosure falls under one of the following categories:

  • In some states, the statute of limitations for foreclosure is six years, based on the right to enforce a promissory note under the Uniform Commercial Code (UCC).
  • Other states base the statute of limitation for a foreclosure on the one for written contracts.
  • State law might provide a specific statute that addresses foreclosures.
  • Or the relevant statute of limitations could be the one for enforcing a security interest in land, such as a security interest created by a mortgage or deed of trust.

But the law varies from state to state. So, the statute of limitations could be six years, ten to twenty years, or shorter or longer, depending on state law.

When Does the Statute of Limitations Start to Run for Foreclosure?

The statute of limitations for an unpaid installment usually starts to run when the borrower defaults on the loan by missing a payment. Some courts treat each missed payment like a new default, which restarts the clock.

For the full loan, the statute of limitations typically begins when the loan becomes due (that is, on the loan's maturity date). The limitations period also sometimes gets triggered when the lender accelerates the loan.

Raising the Statute of Limitations as a Defense to Foreclosure

If the lender initiates a foreclosure after the statute of limitations has expired, the borrower can raise it as a defense. You must raise this issue in front of a judge. The process is easier in a judicial foreclosure than in a nonjudicial one.

If you don't assert a statute of limitations defense, then this defense is deemed waived. So, borrowers must be aware of the statute of limitations in their state because it could mean a quick end to a foreclosure if the time limit has expired.

What If the Statute of Limitations Runs Out After Foreclosure Starts?

If the statute of limitations runs out after the lender starts the process, then the statute of limitations won't work as a defense to the foreclosure. Even when a foreclosure takes years to complete, which is common in some states, if the statute of limitations runs out while the foreclosure is in process, the foreclosure can still proceed.

Example #1. Say your lender files a foreclosure lawsuit against you in January 2024, and the statute of limitations runs out in June 2024, while the foreclosure is pending. You can't bring up the statute of limitations as a defense in this situation.

To comply with a statute of limitations, the lender has to begin the foreclosure before the specified period expires. But if the foreclosure is canceled or dismissed, the statute of limitations will generally apply to any subsequent foreclosure if the lender didn't revoke the loan's acceleration. So, the lender could restart the foreclosure, but the restart would have to occur within the period provided for in the statute of limitations.

Example #2. Going back to the example above, if the foreclosure was dismissed in April 2024, the lender would probably, depending on state law, need to start another foreclosure before June 2024 to fall within the statute of limitations.

But if you make a payment in the interim, the statute of limitations usually resets. Also, the statute of limitations generally starts over if the lender de-accelerates the loan by giving clear notice that it is canceling the acceleration and permitting you to keep making payments. However, at least one court in Florida has ruled that dismissing a prior foreclosure action de-accelerates the loan. (Bartram v. U.S. Bank, 211 So. 3d 1009 (Fla. 2016)).

In New York, the Foreclosure Abuse Prevention Act significantly restricted the circumstances under which the statute of limitations for a foreclosure may be reset or extended in that state. Under this law, a lender's voluntary discontinuance of an action to foreclose a mortgage doesn't stop the six-year statute of limitations period from running.

Entering into a repayment plan or considering you for a loss mitigation option, such as by accepting loan modification trial payments, doesn't necessarily de-accelerate the loan. State law and the circumstances determine whether the loan was de-accelerated and the statute of limitations restarted.

Talk to a Lawyer

While this article provides a general picture of foreclosure processes, laws differ among states. To get specific information about your state's foreclosure procedures, how they apply to your particular situation, and your legal rights, consider talking to a local foreclosure lawyer.

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