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What to expect during the foreclosure process

When you stop making mortgage payments, the lender may take possession of your home.

A foreclosure occurs when a homeowner fails to make mortgage payments to the lender. The bank, credit union, or other financing company takes possession of the home and sells it to recover its losses. A foreclosure can hurt your credit rating and make it difficult to buy a home in the future, but understanding how the foreclosure process works can help you prepare for it.

What happens when you miss mortgage payments?

If you miss a mortgage payment, the lender can legally accelerate the note on your house. This means that it can demand payment in full. Most banks don't immediately choose this option because if their customers can't make a mortgage payment, they certainly can't pay off the loan.

The lender can also start foreclosure proceedings. There are no laws about how many mortgage payments you can miss before the lender can foreclose on the house. According to California bankruptcy attorney Richard Glenn Elie, the bank's policies will decide how quickly you receive written notice that the bank intends to foreclose.

Steps of the foreclosure process

The foreclosure process can take anywhere from several months to more than 2 years. The bank or creditor must follow several steps to protect its investment and to respect your rights as the borrower. The process generally involves:

  1. Pre-foreclosure: In this stage, the lender sends a notice of default to the homeowner. This document details the amount you owe as well as the amount you must pay by a specific date to stop the foreclosure.

  2. Court appearance: In many jurisdictions, you will appear before the court with your creditor. A judicial foreclosure (one that takes place in court) requires the judge to sign off on the foreclosure before the bank can take put it up for auction.

  3. Repayment period: You have until 5 days before you home is auctioned to pay the creditor the past amount due and any fees. If you succeed, the foreclosure process is over and you get to stay in your home (as long as you continue to make on-time payments).

  4. Auction: If you don't make the payments, the bank auctions off your house. If you stay in the property, the people who buy it can evict you.

How does a foreclosure auction work?

In many states, foreclosure auctions are overseen by the sheriff's department. Potential buyers bid on the home until nobody else challenges the last bid. Most creditors establish a minimum bid (the lowest amount it's willing to accept for the home).

If someone bids successfully, they take ownership of the property after they pay the creditor. You must then leave the home because it belongs to the new owners. If the home doesn’t sell at auction, it becomes an REO (real estate owned) property. This means that the bank or lender owns it and can attempt to sell it through a second auction or some other method.

Can you stop a foreclosure?

There are several ways to stop the foreclosure process, some of which depend on the circumstances. You can file for bankruptcy if you're experiencing a financial hardship that has caused you to miss mortgage payments. This removes other debts from your plate and will stop the foreclosure proceedings. However, if you don't have a way to recover and start making timely mortgage payments, this might not work well for you.

You can alsofile a request for preliminary injunction, which allows you to present a defense against foreclosure. This strategy can delay the process until you can make your payments.

There are also several arrangements that you can work out with your creditor:

  • Forbearance: A short-term reduction in payments that allows you to keep your home
  • Loan modification: A permanent reduction in payments that makes your loan more accommodating
  • Short sale: The sale of a property for less than what is owed
  • Deed in lieu of foreclosure: The borrower voluntarily surrenders the property to the creditor to avoid foreclosure

Each of these options requires the bank to agree. In many cases, however, these alternatives are more advantageous for the creditor than the foreclosure process.

What are the long-term consequences of foreclosure?

When the bank forecloses on your home, it will make a note in your credit report. You might have trouble qualifying for all types of loans, including credit cards, car loans, and future mortgages. Additionally, the fees and other costs associated with the process might place you in financial hardship. Recovering from a foreclosure can prove difficult.

If you're facing a foreclosure, seek the guidance of a real estate lawyer. Your attorney can help you find new options and assert your rights in court.

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