If you fall behind on your mortgage payments, the lender or current owner of the loan (the bank) is going to start taking steps to collect from you and prevent further losses. You'll get phone calls and letters about bringing the loan current. Eventually, if you don't pay the overdue amounts, the bank will likely initiate a foreclosure.
Facing a foreclosure can be a great source of stress and emotional turmoil. Many homeowners in this predicament can't sleep, fall into depression, have strained personal relationships, and find that the stress negatively impacts their performance at work. But you don’t have to panic. In most cases, the bank can’t start a foreclosure right away and the process is structured—and sometimes lengthy. You’ll have time to make a plan and evaluate your options so long as you act as soon as you know you’re in trouble. (To learn the foreclosure laws in your state, see Finding Your State’s Foreclosure Laws.)
In this article, you’ll learn how long you likely have before a foreclosure will start and you'll get a general overview about what will happen in the lead-up to foreclosure, in order of what you can expect.
When taking out a loan to buy a home, a borrower typically signs two primary documents: a promissory note and a mortgage (or a deed of trust). The promissory note is the personal promise to pay back the money borrowed. The mortgage or deed of trust, on the other hand, establishes the lender’s lien on the property and is recorded in the county records.
The terms of most promissory notes require the borrower to make a payment by a specific day of the month and include a grace period for the payment. If you fail to make the payment before the expiration of the grace period, your bank will assess a late fee. The amount of the late fee is set out in the promissory note you signed when you took out your mortgage, and is typically around 5% of the overdue payment of principal and interest.
Also, if you default on the loan, the terms of your mortgage likely allow your bank to pass on certain expenses to you. These expenses include attorneys’ fees and inspection charges, among others.
In most cases, shortly after you start missing payments, federal law requires the servicer (the company that manages your loan account on behalf of the bank) to contact you in person and in writing to let you know about foreclosure avoidance—called “loss mitigation”— options.
The servicer has to make live contact with you—or take reasonable steps to contact you—by phone or in person no later than the 36th day of the delinquency to talk about loss mitigation options. So, your servicer will probably try to call you shortly after you miss your second payment. The servicer also has to contact you again within 36 days after each payment due date for as long as you’re delinquent on the loan, even if the servicer previously talked to you. However, if you filed bankruptcy or told the servicer to stop communicating with you under the Fair Debt Collection Practices Act (FDCPA), and the servicer is subject to that law, the servicer doesn’t have to try to call you.
Also under federal law, the servicer has to mail you a notice with information about potentially available loss mitigation options no later than the 45th day of the delinquency. The servicer has to send the letter again no later than 45 days after each payment due date as long as you’re delinquent, but not more than once during any 180-day period. But if you’ve filed bankruptcy or told the servicer to stop communicating with you under the FDCPA, the servicer might not have to send the letter or might send a modified letter.
Once you're around 90 days delinquent on payments, the servicer will likely send you a breach letter. The breach letter will likely give you 30 days to reinstate the loan and avoid a foreclosure. Be aware that state law might also provide a right reinstate, even after foreclosure begins.
Most mortgages and deeds of trust require the lender to provide a breach letter before accelerating the loan. (An acceleration clause in the mortgage or deed of trust gives the bank the right to call the entire mortgage debt due and payable immediately upon the borrower's default. The bank must accelerate the loan as a precursor to foreclosing.)
Under federal mortgage servicing law, the servicer can’t start the foreclosure process by making the first notice or filing until you're more than 120 days overdue on the loan. The foreclosure will be either judicial or nonjudicial, depending on state law and the circumstances. A foreclosure will remain on your credit report for seven years and could prevent you from buying another home for several years.
One of the biggest mistakes you can make when you skip a mortgage payment or two is to put your head in the sand. Once you realize that your financial troubles have escalated to the point that you're going to keep missing payments, you should begin exploring your options immediately. Contact your loan servicer to find out what foreclosure alternatives—like a loan modification, short sale, or deed in lieu of foreclosure—are available to you and make an appointment to speak with a HUD-approved housing counselor for free help. Finally, you might want to consult with an experienced foreclosure attorney for advice tailored to your specific situation.