In the face of unforeseen challenges like foreclosures and evictions, homeowners find themselves navigating turbulent waters. The economic ripples caused by the Covid-19 pandemic have undoubtedly cast a shadow on the housing market, making these times exceptionally trying.
Throughout the pandemic, the United States government stepped up to provide crucial support for homeowners grappling with the threat of foreclosures and the fear of losing their cherished homes due to missed payments. A federal moratorium on foreclosures acted as a safeguard against a wave of potential foreclosures for a limited time.
As the pandemic lessens the foreclosure moratorium is being carefully rolled back. Although the journey towards recovery is ongoing, sporadic efforts continue to be made to mitigate the risk of foreclosures. However, it's evident that homeowners are once again finding themselves primarily responsible coming current on their mortgage payments.
Foreclosure sale is the process where a mortgage lender will attempt to take ownership of a property bought by the loan they granted after the borrower has failed to maintain their payments. The lenders will then sell the property in order to recover the money they lended over for the loan.
As part of a mortgage agreement, lenders will require that the property being purchased is used as collateral. If the mortgage borrower fails to repay the loan according to the mortgage agreement, the lender will have the legal right to seize the collateral to cover the expenses of the loan. The property is usually sold at an auction to the highest bidder, and the borrower will be required to leave as soon as the bidding is completed.
A foreclosure will be placed on the borrower’s credit report and will remain for a period of seven years. During this time, it will be nearly impossible to be approved for another mortgage, as waiting periods need to expire before you are eligible again. Foreclosure can be a fairly lengthy process and will take several months from the beginning until the end. During that time, penalties and interest will continue to accrue and your credit score will continue to be negatively impacted.
The process of a foreclosure will vary depending on the state, but most of the laws are pretty similar. The key differences will come as a result of the specific type of foreclosure (judicial or non-judicial), since this determines the longevity and protocol required for the process.
There are three different types of foreclosure, and each will come with its own clear and established procedures. Due to federal law, each foreclosure will require a specified amount of time where the borrower can catch up on their payments. After this amount of time has lapsed then the foreclosure will be triggered and start to pick up momentum fast.
These are the different types of foreclosures and how they work:
Judicial foreclosures are the most common type of foreclosure in the United States. They are permitted in every state, with a few states specifically requiring them to allow a foreclosure to transpire.
Judicial foreclosures get their name because they will require using the local courts in order to proceed to the next step of a foreclosure. The lender will need to file a civil lawsuit against the borrower and serve them with an official summons and notice of default.
If payments are still not made then the county clerk will place a lien on the property and establish a date, time, and location for a public auction. Information regarding the auction will be publicly posted for a specified period of time that can vary depending on county or state laws.
The borrower will have up until the date of the auction to repay what’s owed and stop the foreclosure from proceeding. If the mortgage remains in default, the auction will be carried out, and the highest bidder will take legal ownership of the property. The deed will be transferred to them, and the borrower will have a specified amount of time to vacate the premises.
Power of sale foreclosures, also known as statutory foreclosures, will take significantly less time to complete. However, there are two crucial elements that must be present in order for a power of sale foreclosure to transpire.
The first of which is the lender must include a power of sale clause in the original mortgage agreement. A borrower will allow this potential consequence in the event that they default on their loan. The second is that the state must legally permit a power of sale foreclosure. Just over half of all states allow this power of sale foreclosures, including:
A power of sale foreclosure essentially operates in the same way as a judicial foreclosure without the involvement of local courts. They will still require operating without the established guidelines of federal laws, so the borrower must be notified that the loan is defaulted and given time to catch up on payments. If no payments are made in the established time, the property will be put up for public auction and sold to the highest bidder.
Only two states (Connecticut and Vermont) still allow strict foreclosures, so they are the rarest of the three. A strict foreclosure basically operates in the same way as judicial foreclosure, except that the property doesn’t go to auction at the end.
The lender will first ask the court to order a borrower to pay the mortgage for these foreclosures. The court will set a date and establish a timeframe for the borrower to comply. If the borrower doesn’t pay off the balance, the court will award the deed and full property ownership to the lender. The lender will then have the option to do whatever they wish with the property.
Federal law prohibits any official foreclosure actions to be taken against a borrower until they are 120 days delinquent on their mortgage payment. However, the foreclosure process will technically start as soon as the borrower has missed the first payment.
Nearly all mortgages are set to be paid during the first few days of the month. Some lenders allow a grace period of a few days without penalty, but plenty of them will charge a fee for late payments. If the payment still hasn’t been made after around 10 to 15 days, the lender will most likely try to contact the borrower and notify them that they haven’t received any payment for the month.
The attempts to notify the borrower will increase until the payments are 90 days past due. A notice of default will be sent, giving the borrower an additional 30 days to remedy any past due payments. After 120 days of non-payments, the foreclosure process will be permitted to continue in whichever form the lender is legally entitled to seek.
The overall length of time for foreclosure can significantly vary based on the state and its specific laws. As mentioned earlier, federal law requires that the lender give the borrower 120 days before escalating foreclosure proceedings and taking action to seize the property. However, after that period has concluded, the length of time can range between a few days and a few years.
Due to the usually slower pace of most local courts, judicial foreclosures generally take the longest to complete. Since each step will require a court order to permit, it will usually take around six months to a year after issuing a notice of default. On the other hand, power of sale foreclosures can happen faster since the courts aren’t involved, and it might take as little as two or three months to complete.
In the second quarter of 2021, the national average for foreclosure was 922 days from the public foreclosure notice’s date. However, the discrepancy between states significantly varied and is worth noting.
The top five states with the longest average foreclosure times were:
The top five states with the shortest average foreclosure times were:
Unsurprisingly, the top five longest times occurred in states that don’t allow power of sale foreclosures for their residents. What is surprising is that Arkansas and Virginia were in the top five for fastest foreclosure times despite only allowing judicial foreclosures. These results are proof that it can be very difficult to estimate the length of time it takes for a property to be foreclosed on.
The foreclosure process can be stopped at nearly any time by paying off the outstanding mortgage payments that have accumulated. Each state has its own specific set of laws for this, as they do for just about every other part of the foreclosure process. Some states allow payments up to the day of the public auction. Others allow them until the deed is officially signed and transferred. A few of them even grant a period of reinstatement that can last up to a year after the auction has taken place.
The mortgage lenders that pursue foreclosures are simply wanting to get paid back the money they loaned out. They typically won’t care where the money comes from as long as they make out okay on their end of the deal. As long as the payments (along with late fees and other charges) are made, and the mortgage is brought to current status, they will drop their pursuit of foreclosure and return to business as usual.
As the foreclosure continues to proceed, it will only get harder and harder to catch up on mortgage payments. Luckily, a few alternative options are available that can help borrowers stay in their homes and end the foreclosure. A few of these options include:
Mortgage forbearance was a very common practice during the Covid-19 pandemic. If granted by the mortgage lender, the borrower will have a specified period before payments are to resume. The catch is that the borrower is on the hook for the amount that accrued during the forbearance. For example, if a borrower is already behind by two payments and is granted a forbearance of six months, they would owe eight months of mortgage payments when the forbearance ends. For most homeowners, forbearance ends up just delaying the foreclosure process vs solving the actual problem.
By partnering with a company like Balance Homes, homeowners can get paid cash for their home’s equity and, in most cases, save money each month by lowering their monthly debt obligations. Balance would pay off the remaining mortgage balance plus any liens. Balance co-owners will continue to own their home and remain on title. Balance helps homeowners improve their finances so they can exit Balance's co-ownership and go back to a traditional mortgage.
Most mortgage lenders probably won’t be willing to negotiate if the foreclosure process has already been triggered, but it can be worth a try. Refinancing a mortgage is basically taking out a new mortgage in order to pay off the old one. Adding a few years onto the length of the mortgage can help lower monthly payments and make it easier for a borrower to continue making them.
Foreclosure laws can vary significantly from state to state, but a few federal laws are in place to help homeowners stay in their homes. A mortgage lender must wait for a borrower to be 120 days delinquent before making a first notice or filing for foreclosure. During these four months, the borrower is allowed to catch up on their payments or pay off the remaining balance on the mortgage.
Entering into a co-investment opportunity with a partner like Balance Homes can help with the latter option for those who qualify. Time is of the essence when facing a potential foreclosure, so reach out to Balance to see if you qualify for a co-investment to pay off your mortgage.
Sources:
Judicial Foreclosure Definition | Investopedia
Foreclosure Filings Hit All-Time Low Midyear 2021 | ATTOM Data
Avoiding Foreclosure | US Department of Housing and Urban Development
How to Refinance Your Mortgage | Nerd Wallet
Learn about forbearance | Consumer Finance
Foreclosure Process | US Department of Housing and Urban Development
Power of Sale Definition | Investopedia
New CFPB Rule Protects Homeowners Facing Foreclosure | NCLC Digital Library
