The 6 Phases of Foreclosure

 Foreclosure is the procedure by which a lender can recoup the amount owed on a defaulted loan by selling or seizing the property. There are six typical phases of a foreclosure procedure, despite state-specific variations in the foreclosure process.
 

• A foreclosure occurs when a lender attempts to seize the property used as collateral for a loan because of nonpayment.

• Typically, there are six phases in the foreclosure process, although the precise steps vary by state.

• Prior to a home's foreclosure, the owner is given thirty days to satisfy their mortgage obligations.

Phase 1: Payment Default

Payment default occurs when a borrower has skipped at least one mortgage payment; however, the precise definition varies from lender to lender. After the first missed payment, the lender will contact the borrower via letter or telephone.

Many lenders offer a grace period until the 15th of the month for mortgage payments due on the first of each month. The lender may then assess a late payment fee and send a notice of missed payment.

After two months of missed payments, the lender will likely contact the borrower by phone. However, the lender may still be willing to work with the borrower to make preparations for catching up on payments, including making a single payment to avoid falling further behind.

Once a borrower has gone three months without making a payment, the lender typically sends a demand letter (or notice to accelerate) outlining the delinquent amount and giving the borrower 30 days to bring the mortgage current.

There are three possible outcomes for a mortgage in default: return to good standing, modification, or repossession or sale of the property through foreclosure or voluntary surrender.

Phase 2: Notice of Default

After four months of missed payments, a notice of default (NOD) is issued (90 days past due). This public notice gives the borrower thirty days to rectify delinquent payments prior to initiating the formal foreclosure process.

Most lenders will not send a notice of default until the borrower has been delinquent for 90 days (three consecutive missed payments). Consequently, a borrower can frequently fall behind by one or two months without facing foreclosure.

In general, federal law prohibits a lender from initiating foreclosure proceedings until the borrower is 120 days delinquent.

Phase 3: Notice of Trustee’s Sale

State-by-state, the procedure for initiating a foreclosure is distinct. In some states, it is possible to initiate a nonjudicial foreclosure by filing paperwork with the appropriate court. With this, the process of foreclosure can proceed rather quickly. In other states, judicial foreclosures require court approval at each step, extending the duration of the process.

Once forms have been filed with the court or the necessary approvals have been obtained, the lender's attorney or trustee will schedule a property sale. A notice of trustee's sale (also referred to as a notice of sale) is then recorded in the county where the property is located, specifying the sale's time, location, and minimum opening bid.

In addition, the lender must generally advertise the property (via newspaper ads, signs, etc.) in the weeks preceding the auction, indicating that it will be available.

The time between the demand notice and the auction date varies by state, but may be as short as two to three months. The borrower may still make regular payments or pay the balance due, including attorney fees incurred by the lender to initiate the process, until the date of the auction.

Phase 4: Trustee’s Sale

The property is now up for public auction, and the highest bidder who meets all requirements will receive it. The lender (or lender's representative) will determine the opening bid based on the amount of the outstanding loan and any liens, unpaid taxes, and sale-related expenses.

It is up to the purchaser of a foreclosed property to determine how long the previous owners may remain in the property.

Once the highest bidder has been confirmed and the sale has concluded, the winning bidder will receive a trustee's deed upon sale. The property is then transferred to the buyer, who has immediate possession rights.

Phase 5: Real Estate Owned (REO)

The lender will establish a minimum bid based on the property's appraised value, the remaining balance on the mortgage, any other liens, and attorney fees. If the property is not sold at the public auction, the lender will attempt to sell it through a broker or a real estate-owned (REO) asset manager. These properties are frequently referred to as "bank-owned," and the lender may remove some liens and other expenses to make the property more desirable.

Phase 6: Eviction

As soon as the auction concludes and a new owner is named — either the auction winner or the bank if the property is not sold — borrowers who are still living in the property are issued an order to vacate. This notice of eviction requests that all occupants immediately vacate the premises.

The occupants may be given multiple days to vacate the premises and remove any personal belongings. The local sheriff or law enforcement will then typically visit the property to remove and impound any remaining items.

Foreclosure and COVD-19 Relief

As part of legislation providing relief from the COVID-19 pandemic, borrowers with government-backed loans may be able to avoid foreclosure, receiving up to 12 months of forbearance if they do not apply for initial forbearance.

There is currently no deadline for applying for initial forbearance if your mortgage is backed by Fannie Mae or Freddie Mac. If your mortgage is insured by HUD, FHA, USDA, or VA, you have until September 30, 2021 to submit an application for initial forbearance.

What Is a Pre Foreclosure?

Pre-foreclosure is the period preceding the beginning of the foreclosure process. When you have fallen behind on your payments and the lender issues a notice of default(NOD), you are in default .

What Is REO Foreclosure?

Real estate owned (REO) refers to a property that a lender or bank foreclosed on but was unable to sell at the auction. Thus, the lender is the owner of the foreclosed property.

What Is Deed in Lieu of Foreclosure?

A deed in lieu of foreclosure is a document through which a property owner voluntarily transfers ownership to avoid foreclosure. Typically, this is less detrimental than a foreclosure.

The Bottom Line

Throughout the foreclosure process, many lenders will attempt to help borrowers catch up on their payments and avoid foreclosure. If there is a chance the borrower can catch up on payments for example, if they just started a new job after a period of unemployment.  It is worthwhile to contact the lender in an effort to make arrangements or modify the existing loan.