The Stages of Foreclosure

Foreclosure In Brief: What It Is, How It Works.

Foreclosure is the process where a lender can sell or repossess (take ownership of) a property in order to recover the amount owed on a defaulted loan secured by the property. Anyone worried about missing their mortgage payments should understand how foreclosures work.

State laws govern the foreclosure process. Procedures vary from state to state. The California Non-Judicial Foreclosure Timeline is very simple. If your home is in another state you will want to check with your own state to learn the details, including whether a judicial procedure is required. Knowing the timeline and process in your state helps you shape the most effective strategy and avoid procedural pitfalls.

3 Stages of Foreclosure
Following is a broad-brush summary of the three stages of foreclosure. We've assumed the homeowner/borrower fails to satisfy the repayment obligation along the way.

Stage 1: Pre-foreclosure
This stage begins when the homeowner falls behind on home-loan payments (or sometimes other terms of the loan). Lenders may wait for a second, third, fourth or even more missed payments before sending the homeowner a notice of default - which becomes public record. The homeowner then has a given period of time to respond to the notice and/or come up with the outstanding payments and fees - sometimes by selling the home in a pre-foreclosure sale. (If a judicial procedure is required, it occurs after the notice of default is given.)

One type of pre-foreclosure sale is a short sale - when proceeds from the home sale are less than the amount of mortgage still owed to the homeowner's lender (also known as being "under water" or "upside down" because the seller would need to "leave money on the table" if the lender doesn't agree to the short sale). A lender-approved short sale (or short payoff) occurs when the homeowner's lender agrees to accept the proceeds of the "distressed" home sale as satisfaction of the mortgage owed, even though proceeds are less than the outstanding debt.

Stage 2: Foreclosure
At this stage, the former homeowner may or may not have been evicted (depending on state law) when the lender puts the home up for public auction "on the courthouse steps" (after a judgment of foreclosure in those states requiring judicial procedure).

If the home sells at auction, money from the sale is used to pay off the costs of the foreclosure, taxes and other prior liens, service charges and advances, interest and principal on the mortgage, late charges or fees, and liens recorded after the first mortgage. Any amount left over is paid to the borrower (former homeowner). When proceeds from the sale are less than the various amounts owed, the lender may be able to hold the borrower responsible for the difference.

Stage 3: Post-foreclosure
When a property that does not sell at auction - either because no one bid on it or bids were too low to cover the outstanding loan - the property becomes real estate owned (REO) by the lender (or government agency that guaranteed the loan - HUD, VA, etc.). The "bank owned" property is put back on the market for sale, usually listed through a real estate broker.