If you can no longer make the payments on your mortgage, your property will likely be seized by your lender and then sold, so they can recoup some of their losses. This is true for any loan that is secured by your home, whether it is your primary mortgage, second mortgage, or any other type of home equity loan.
A foreclosure can take anywhere from six months to two years, depending on state laws, efforts on behalf of the homeowner, and the backlog of foreclosures in the county. Each state has its own specific foreclosure law that determines what must take place in order for the foreclosure to be valid, and each state also has different protections for a home owner, as well as what rights a lender has to the home.
Even though the laws differ from state-to-state, there are some basics to the foreclosure process:
- Missed payments: Usually, the foreclosure process is initiated after you have missed between three and six months of payments.
- Notice of Default: When the payments have been missed for the prescribed period of time, the lender files a Notice of Default, usually at the county recorder’s office. The borrower will also receive a copy of this notice.
- Reinstatement period: The Notice of Default marks the beginning of the reinstatement period, which normally lasts three months. This is the period of time that you as borrower have to bring your payments current, or to work out some other arrangement that the lender accepts. In many cases, the reinstatement period runs up to about five days before any auction.
- Notice of Sale: If you are unable to bring your loan current, a Notice of Sale is usually filed, which sets an action date for your property. A copy of the notice is sent to the homeowner, posted on the property, run in local newspapers, and recorded with the county. In most cases the borrower will still be within the reinstatement period, so receiving a Notice of Sale, does not mean you have lost your property.
Trustee sale: This is the foreclosure auction. If the borrower hasn’t brought the loan current within the reinstatement period, the home is auctioned off to the highest bidder. Usually, the sale takes place at the county courthouse. The lender sets the opening bid and in many cases, will set the opening bid at the amount still owed on the property, including interest and fees (or, if the home is underwater, the lender may decide to set the opening bid a little below market value).In most cases, the winning bidder is required to pay for the property in cash. A deposit can be made at the auction, but the remainder is normally due within 24 hours of the end of the auction. Once the total is paid, the winner of the auction receives the deed to the home, and is considered the lawful owner.In some instances, the auction doesn’t yield an outside buyer. If the opening bid is not met, someone acting on behalf of the lender purchases the property, and it is considered Real Estate Owned (REO). The lender then owns the home and will try to sell it later, or find some other way to make money from it, such as renting it out.
After the sale of the property, the loans that are paid from the proceeds of the auction are then prioritized according to date of record and junior liens (except property taxes) are often terminated.
If you are unfortunate enough to find yourself in foreclosure proceedings, it is important to understand the process and the time frames for each step. It is also highly advisable to seek an attorney’s counsel as laws and consumer protections do vary between states. Take every precaution you can to help you work through this difficult time.