Simply put, foreclosure is the process by which a lender attempts to recover the money owed on a defaulted loan by taking ownership of and selling the mortgaged property.
While the process varies from state to state, the good news is foreclosure doesn’t usually happen overnight and often the lender works closely with the borrower to prevent it. Read below to learn more about the steps to take when preparing for a foreclosure.
Step 1: Payment Default
If you miss even one mortgage payment, your loan is considered to be in default. Many lenders offer grace periods, but then they might send you a demand letter requesting payment within a number of days after receiving the letter.
Step 2: Notice of Default
After 90 to 180 days of missed payments, the lender records a Notice of Default with the County Recorder’s office and sends a certified copy to the borrower. This begins the reinstatement period, in which the borrower can still make a payment to reinstate the loan and prevent the foreclosure process from continuing.
Step 3: Notice of Trustee’s Sale
If the borrower fails to reinstate the loan, the lender will move forward with recording a Notice of Trustee’s Sale with the County Recorder. This is a public notice that the property will be up for sale at a public auction. Even now, the borrower usually has up to 5 days before the sale to catch up on payments and prevent foreclosure.
Step 4: Trustee’s Sale
The lender calculates an opening bid for the auction, usually based on the outstanding loan, liens, taxes, and other costs. The property is sold to the highest qualified bidder. The new owner now holds all legal rights to the property and the original borrower must vacate the property.
Step 5: Real Estate Owned
In the event that the property is not sold during the public auction, the property becomes real estate owned (REO) or bank-owned. The lender will try to sell the property, perhaps with the help of a broker or REO asset manager. The lender, as the property owner, can ask the original borrower to vacate the property.
Step 6: Eviction
If the original borrower refuses to vacate the property or does not do so in a timely fashion, the new owner may initiate legal eviction proceedings. At this point, the local courts and law enforcement may become involved.
Communicate with the Lender
Sometimes changes in life cause you to miss or make a late payment. The problem is, if you miss one payment, it may become increasingly difficult to then catch up. If that’s the case, speak with your lender immediately. Lenders generally work hard to keep the borrower in their home. But if foreclosure is inevitable, at least you can prepare for the process.