Understanding Foreclosure: A Guide for Imperiled Homeowners

For people faced with the potential of foreclosure, it’s natural to feel anxious and confused. How long does the foreclosure process take? Will you be able to remain in your home in the interim? What rights do you have, and how can you exercise them?

This guide will walk you through the foreclosure process and arm you with the knowledge to deal with this unfortunate circumstance.

What Is Foreclosure?

Foreclosure is the legal process that allows a lender to repossess and/or sell a property that secures the mortgage loan when the borrower defaults on the mortgage by failing to make payments. In the foreclosure process, the property is sold at auction to the highest bidder, or it reverts back to the lender that will subsequently market and sell the property to reduce the amount lost from the default of the loan.

If you’re facing foreclosure: It is in your lender’s best interest for you to stay in your home because a foreclosure costs your lender time and money. There are many ways to avoid foreclosure, and your lender will be happy to work with you to help you either bring your loan current, discuss options for more affordable payments, or transition to a more affordable home.

What Should I Expect During a Foreclosure?

In most states, there are common steps in the foreclosure process that must take place before a home is considered “foreclosed on.” We’ll discuss each below.

1) Pre-Foreclosure

The process begins with a Notice of Intent to Foreclosure (often known as an “NOI” or “breach letter”) from your lender, which opens the period known as Pre-Foreclosure. The NOI is a written notice sent by the lender to the borrower that outlines what is needed to pay and when it must be paid to prevent foreclosure.

If you wish to avoid foreclosure, either through home retention programs such as short -term repayment or forbearance plans or more long-term loan modifications, or through a sale of the property for less than the amount owed (known as a short sale) or transfer of title to the lender (known as a deed in lieu of foreclosure), now is the time to act. Ignoring an NOI ensures that the process continues. Reach out to your lender during this time—they may have alternatives to foreclosure. Even if you’re not able to save your home, you may be able to prevent a foreclosure from appearing on your credit report through one of these programs.

A note of caution: Foreclosure notices are public record and, as such, scammers will often approach stressed-out homeowners with questionable offers. Learn how to protect yourself from foreclosure scams.

2) Loan Acceleration

If you do not timely repay the amount in default referenced in the NOI, the next step is loan acceleration. The NOI only requires you to pay the past due payments of principal, interest, escrow and fees and costs incurred to bring the loan current. If you fail to bring the loan current within the time required in the NOI, the lender can accelerate the loan balance. This allows the lender to effectively call the entire balance of the mortgage immediately due and payable as a result of your default or breach of the terms and conditions of your loan agreement. It’s no longer enough to come up with a few months of missed payments; the full amount of the mortgage debt must be paid off.

Once the loan has been accelerated, your lender is free to proceed with the foreclosure. The exact process depends on your state.

3) Foreclosure Auction

The final step in foreclosing on a home is for the property to be offered for sale at a public foreclosure auction.

You will receive a notice that specifies the date, time, and location of the foreclosure sale. The Notice of Sale—including the auction date—is also made public, generally via county land records and local newspapers and may be posted on the door of your property as well as sent via mail.

At the auction, the bidding for the property usually begins at a dollar amount set by the lender, generally based on the property’s value and/or the amount of the debt. Once the lender’s starting bid is announced, other auction attendees may offer higher bids until the property is sold. The exact auction process depends on your county and state.

If there are no bidders other than the lender, the title to the property reverts to the lender and the property is classified as the lender’s REO (real-estate owned). After some time, REO properties may be sold by the lender to recoup its losses.

If you’re interested in learning about purchasing REO properties, check out our Guide to Buying REO Homes.

Foreclosure Proceedings

There are generally two types of foreclosure you may face in the United States:

• Judicial Foreclosure
• Non-Judicial (or “Power of Sale”) Foreclosure

We’ll take a look at each in turn.

Judicial Foreclosure

Every state allows judicial foreclosures, and many states require them. A judicial foreclosure is conducted through a lawsuit in state court. Because of this, judicial foreclosures tend to take longer and be more expensive than non-judicial foreclosure (discussed below), lasting months or even years.

The judicial foreclosure begins with your lender filing a lawsuit against you in court. You’ll be personally served with a Summons and Complaint that describes your loan, your failure to make payments or other default under your loan documents, and a request for an order allowing the lender to foreclose on the property. If you believe the foreclosure action is not valid and want to oppose the action, you would file an answer to the complaint within the time described in the Summons.

If you fail to timely file your answer and/or otherwise appear in front of the judge for any required hearings, your lender “wins” the case and a judgment will be entered that allows the sale of your house to proceed. If, however, you object to the foreclosure in your answer, you’ll have your day in court and be allowed to tell your side of the story. The judge will then decide whether the property can proceed to sale or not.

It is highly recommended that you hire an attorney to defend you in the foreclosure action.*

Power of Sale (or Non-Judicial) Foreclosure

Non-judicial foreclosures do not go through the court system. They’re generally quicker, easier and less expensive than their judicial counterparts, with many only lasting a few months from the NOI to the sale of the home.

In a non-judicial foreclosure, you will receive a formal notice of your default and when a sale has been scheduled. These non-judicial foreclosure notices are recorded in county real property records and may be posted on the property as well as mailed to you. Notice of the sale may also be published in the legal notices section of your local newspaper to alert interested parties.

Foreclosure Terms You Need to Know

Now that you understand how the foreclosure process works and how different types of foreclosures have different rules, it’s time to delve in a bit deeper. You may hear these terms during the proceedings, so it’s important to understand the definition for each.

Deficiency Judgment

In judicial foreclosure states and even some nonjudicial states, the actual foreclosure sale may not be the end of the process. If the judge enters a deficiency judgment, it means that you’ll be responsible for paying the difference between what the property actually sold for and what you owed on it. For instance, if you owed $56,000 and the home only sold for $45,000 at auction, you would still owe the lender $11,000.

Redemption Period

In some states, if you’re interested in buying back your property after it has sold at auction, you may be eligible for redemption—the ability to remain in your home for a certain period of time (generally a year) and reimbursing the new owner the sale price and the fees they incurred.

I’ve Been Foreclosed On. Now What?

Despite your best efforts to the contrary, the foreclosure on your home proceeded to auction and was sold. What happens next?

Once the foreclosure sale has taken place and the property is sold, a foreclosure deed is recorded that transfers title to the property to the winning bidder or the lender. But that doesn’t mean you and your belongings will immediately be thrown out on the curb. Although ownership of the property has transferred and your property now belongs to someone else, there are still formal processes and procedures that must be followed before you will actually be evicted.

Vacating the Home and Eviction

If you do not voluntarily move out of the home, after title has transferred to the lender (and assuming there is no redemption period or the redemption period has expired, the lender can seek to evict you. The laws on eviction also vary from state to state, but generally speaking, the lender files a new lawsuit known as an Unlawful Detainer action to ask the court to issue an order allowing the local sheriff to forcibly remove you and your personal property from the home.

To avoid the stress and embarrassment of being evicted, your lender may be willing to discuss a cash payment known as “cash for keys” to help with your moving expenses. As part of a cash for keys agreement, you will have to leave the property in good condition. (This is a way to combat former owners who are upset about the foreclosure and do significant damage to the property in retaliation.)

Be sure to evaluate your options carefully. While you may be entitled to stay in your residence until you’re served with an eviction notice, that leaves you significantly less time to find a new place to live.

The Bottom Line

If you’re facing a home foreclosure process, it’s crucial to understand that there may be programs available to you to avoid foreclosure and either keep your home or transition to a new home. Pennymac is here for you. Contact a Pennymac Loan Officer today and let us know what we can do to help!

*For specific information about foreclosure timelines, procedures, and eviction in your state and in your particular situation, talk to a local foreclosure attorney.