Foreclosure Process Timeline: What Happens When A Property Goes Into Foreclosure

Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan.

In other words, foreclosures happen when a homeowner fails to keep up with their mortgage payments. According to official figures, in 2022, more than 320,000 properties showed foreclosure activity, representing 0.23% of all housing units in the US. That is, 0.23% of properties fell behind on mortgage payments, received a default or foreclosure notice, scheduled auctions, or were repossessed by lenders.

The foreclosure process begins at that point – when a borrower/owner defaults on loan payments (usually mortgage payments) – and the lender files a public default notice, called a Notice of Default or Lis Pendens.

The foreclosure process can end one of four ways:

• The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
• The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
•  A third party buys the property at a public auction at the end of the pre-foreclosure period.
•  The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).

How does Foreclosure work?

To foreclose in accordance with the judicial procedure, a lender must prove that the mortgagor (borrower/homeowner) is in default. Once the lender has exhausted its attempts to resolve the default with the homeowner, the next step is to contact an attorney to pursue court action. The attorney contacts the mortgagor to try to resolve the default.

If the mortgagor is unable to pay off the default, the attorney files a lis pendens (lawsuit pending) with the court. The lis pendens gives notice to the public that a pending action has been filed against the mortgagor. The purpose of the action is to provide evidence of a default and get the court’s approval to initiate foreclosure.

Non-judicial foreclosures are based on deeds of trust that contain the power of sale clause. The clause enables the trustee to initiate a mortgage foreclosure sale without having to go to court. The trustee is typically required to issue a notice of default and notify the trustor (borrower/homeowner) accordingly about the default status. If the trustor does not respond, the trustee then initiates the steps for conducting the mortgage foreclosure sale of the home.

This foreclosure process allows for three opportunities for finding bargains on foreclosure homes.

Timeline for Foreclosure

First of all, foreclosures don’t happen overnight. Under federal law, lenders can’t start a foreclosure procedure until the borrower is at least 120 days behind on their mortgage payments.

But what exactly constitutes starting a foreclosure procedure?

In judicial states, starting a foreclosure procedure implies filing a suit, complaint, or petition – also known as a first notice – requesting a foreclosure.

In non-judicial states, it’s considered a first notice, any document establishing a foreclosure sale date. Lenders can’t file any of these before the 120-day mark.

Broadly speaking, this is how the foreclosure process goes:

Step 1: Pre-Foreclosure

Property owners who are late in their mortgage payments will receive a Notice of Default from their lender.  Notices of default are filed with the local records authority.  A Lis Pendens filing may also be filed to notify any other lien holders. The Notice of Default provides instructions to the homeowner on the amount they are required to pay and how much time they have to pay. If the homeowner pays according to these instructions, the foreclosure process is ended.

Step 2: Auction

If the loan is not reinstated by the end of the pre-foreclosure period, the property will be sold at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers the lender a way to quickly liquidate the property.  The lender typically sets a minimum bid at foreclosure auction equal to the amount owed on the property plus fees and various costs to the lender.

Step 3: Bank Owned (REO)

Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.

Exits from the Foreclosure Process

Properties may exit the foreclosure process in several ways. Pre-foreclosures may exit the process prior to the Foreclosure Auction in one of several ways:

• Owner catches up on missed mortgage payments
• Owner gets a loan modification to reduce their mortgage payments
• Owner sells the property for less than what is owed on the loan (short sale)
• Deed in lieu of foreclosure

Properties scheduled for a public foreclosure auction exit the foreclosure process by being sold to a third party buyer at auction.

Post Foreclosure

Investor Owned

Investors seek returns in several ways: buying cheap and flipping, making improvements, or renting for longer term appreciation. Investors may buy homes directly from homeowners, at auction, or from lenders.

Consumer Owned

Properties in the foreclosure process must ultimately be bought or rented by ordinary consumers who plan to live in them. This may seem obvious, but the consumer is an extremely important piece of the foreclosure puzzle. Consumers may pay significantly more or nearly nothing for a property based on a myriad of consumer preferences. Consumers may prefer to live near good schools or universities, away from high crime areas, away from hazardous waste sites, etc.

Judicial vs. Non-Judicial Foreclosure Process

In certain status, the foreclosure process no longer requires involvement of the court system. These states are referred to as “non-judicial”. See a comparison of foreclosure laws by state.

How To Avoid The Foreclosure Process

The easiest way to avoid foreclosure is to make your mortgage payments on time. Of course, this isn’t always an option. In the first quarter of 2023, almost 100,000 foreclosure notices were filed in the US.

Before the foreclosure process starts, there are a few things you can do:

• Contact a HUD-approved housing counselor
• Restructure the term of the loan with your lender
• Apply for loss mitigation 
• Request a mortgage forbearance

Your first step should always be contacting a government-approved housing counselor.

If you’ve tried everything and foreclosure is unavoidable, there’s one last resource to minimize the impact on your credit score: a Deed In Lieu of Foreclosure.

A Deed In Lieu of Foreclosure transfers property ownership to the lender – without going through foreclosure –in exchange for relief from mortgage debt.

The main benefit of a Deed In Lieu of Foreclosure is that it stays on your credit report for only 4 years – compared to foreclosures, which stay for up to 7 years. You will also save up on attorney fees and other costly foreclosure proceedings.

As always, we recommend getting qualified legal advice from a local real estate attorney.

FAQs

What State Has The Longest Foreclosure Process?

The states with the longest foreclosure processes are Hawaii, New Jersey, Kansas, Louisiana, and New York. These states support judicial foreclosures, and the average foreclosure takes more than five years.

How Long Can You Go Without Paying Your Mortgage?

In general, the foreclosure process doesn’t start until you receive a Notice of Default at the start of your fourth month of missed mortgage payments. Depending on the state, you can go up to 120 days without paying a mortgage before foreclosure begins.

How Does A Foreclosure Affect You?

A foreclosure can have a long-lasting effect on your credit history. Foreclosures result from falling behind on mortgage payments, and since both late payments and foreclosures impact your score, the effect compounds.

In the most extreme cases, your credit could drop 100-160 points, and it can take anywhere from 3-7 years to fully recover.

Can You Get A Foreclosure Off Your Credit Report?

If the foreclosure was reported accurately, you can’t remove it from your credit report. Instead, it’s cleared automatically no later than seven years from the Day of First Delinquency (i.e., the date of your first missed mortgage payment).

If the foreclosure wasn’t reported accurately, you can dispute it to remove it from your credit report. As always, we recommend getting qualified legal advice from local real estate attorneys.