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HIGHLIGHTS
  • Understand the causes of foreclosure.
  • Review the differences between judicial foreclosure and nonjudicial foreclosure.
  • Examine some ways to stop a foreclosure.

The Causes and Effects of Foreclosure

Foreclosures are happening at record rates in America. Unfortunately, many homeowners have already experienced a foreclosure and many others face the grim reality that they can lose their home. Understandably, this is a stressful and disheartening experience.

Foreclosure is the last rung on the ladder. It is not a good thing for you or for your lender. Foreclosure is a complicated process that involves many legal and tax issues. It is important for you to understand the types of foreclosure, how the process works, and how it can affect you.

Causes of Foreclosure

The threat of foreclosure occurs when an inability to make the mortgage payment combines with a drop in property values. Many homeowners have been placed under financial stress due to mortgage loans that adjusted to a higher interest rate or a higher monthly payment. When the interest rate or the payment rose, many borrowers found their mortgage payments were no longer affordable. Other homeowners experienced a loss of income, making it impossible to pay the monthly mortgage payment.

A home mortgage foreclosure is the legal process through which your mortgage lender moves to take your home away from you, selling it to satisfy your unpaid mortgage. Foreclosure is almost always the result of default on payment.

Foreclosure Process

Your mortgage contract should state exactly how many payments you can miss, before a Notice of Default is filed against you and the foreclosure can proceed. As a general guideline, it may take 90-150 days. It is important for you to keep in mind that your lender very likely will not accept a partial payment on any of your mortgage monthly payments. Unlike a credit card, you cannot mail in a portion of your payment and remain in good standing. Mortgage payment is all or nothing. This also means that if you miss one payment, the next month you have to pay the current month and all arrears, in order to catch up!

At the time that foreclosure procedures begin, your lender will file a Notice of Default against you. This notice is recorded at the county recorder’s office in the county where your home is located. You will receive a copy of the notice, usually by certified mail. Make sure to read the notice carefully. Consider speaking with an experienced attorney, if you receive a Notice of Default. It may specify a timeframe in which you are required to respond, if you wish to head off the foreclosure, or other details that a professional will understand better than you.

There are two types of foreclosure: judicial and non-judicial foreclosure.

Judicial Foreclosure

Some states require a judicial foreclosure. A judicial foreclosure is a court-ordered, public legal process, the rules of which are set forth in state law. Judicial foreclosure laws vary from state to state. The foreclosure moves, sometimes very slowly, through the civil court system, similar to a lawsuit. Some jurisdictions are swamped with foreclosures, which increases the time it takes your lender to finalize a foreclosure against you. In states using a judicial foreclosure process, your lender does not have a forced power of sale clause, which means that lender must use the state's court system to foreclose.

Non-judicial Foreclosure

A non-judicial foreclosure happens outside of court, using a procedure specified both by state law and your loan contract. If your loan terms specify that a foreclosure can take place without the need to go through the court system, then your lender can start the foreclosure process in 60-90 days. In that case, you have a fixed period of time, which varies state-by-state, to either sell the home or to negotiate another solution.

In both judicial foreclosure states and non-judicial foreclosure states, if you do not come to an acceptable accommodation with your lender, your lender then can initiate eviction proceedings, kick you out of your home, and auction it to the highest bidder.

You may find it difficult to work things out with your lender, once the situation has reached the level of foreclosure proceedings. Still, it can be possible. If someone can help you financially or if you have a valuable asset to sell, you can stop the foreclosure by paying back all arrears on your mortgage and any foreclosure fees, or required tax or insurance payments.

Stopping Foreclosure

Forfeiting your home can be very hard emotionally. It also requires you to move and change our day to do day life. You may want to do whatever you can to stay in your home for as long as possible. If there is no feasible way to stop foreclosure proceedings by catching up on your arrears, it makes sense for you to consider filing for bankruptcy.

A Chapter 7 bankruptcy, which discharges certain debt obligations, will put the foreclosure on hold. Because a Chapter 7 procedure usually only lasts a number of months, it is only a temporary fix. A Chapter 13 bankruptcy, which re-organizes your debts, working out repayment terms between you and your creditors may be a more effective solution. Chapter 13 proceedings have payment plans that last as long as 5 years. Once you are under the supervision of the bankruptcy court, your lender needs permission from the court in order to move the foreclosure forward. The level of protection that bankruptcy provides can vary from state to state. Make sure to speak with a licensed and experienced bankruptcy attorney, in order to learn more about this option.

After a foreclosure takes place, it is possible that you may be left with another problem. If your home sells for less than you owe, you may be financially responsible for the deficiency balance, the difference between what you owe and what the lender received in the sale of the home. Learn more about deficiency balances in the next article in this section.

Comments (79)


Chris H.
Louisville, KY  |  January 19, 2012
I have a mortgage with BofA and have let them know tha we are having trouble making our payment. We have never been late on a pmt on any mtg but were late two of the last 3 months. I tried to do a making home affordable program with them but they seem to feel that since I am now curreent that I am OK. I am telling them we need help but they do not want to. We love our home but feel it is easier to throw them the keys and walk away! Rent a home for much less and payoff CC debt and actually go on vacations! We are honest people but feel at this point, take our home back, it would be a weight off our shoulders. My wife is self employed but her income is different month to month. Is there a problem or way to turn our home back to them without financial reprocussions?? Please advise what you think we can do. We are at our wits end. Thx. Chris
Bills.com
January 20, 2012
The best way to free yourself of a property without financial repercussions is to sell it. If you are upside-down, then consider a deed-in-lieu-of-foreclosure or a short sale. Otherwise, what you are describing is called a strategic default.

If you are upside-down and want to stay in the property, consider the HARP 2.0 program.
Christine L.
T/o Webster, NY  |  November 10, 2011
I went through an ugly divorce and my ex was to take over the house after I was required to leave. He left the house and stopped paying the mortgage which my name was on. The house just went into foreclosure which was 2 1/2 years after he stopped paying. I ended up filing bankruptcy earlier this year to get out from under the debt. I'm with someone now and I am trying to purchase a house. Is there a way for both of us to qualify. He has good credit, but currently has a house that will be up for sale next year. We have talked to a mortgage person and we were told that we could not have me on a mortgage. What other options do I have or can I be on a mortgage?
Bills.com
November 11, 2011
Generally, the best loan for people with bad credit is a FHA mortgage. They require a low credit score, currently 580, for those with credit. The FHA will offer loans, assuming you maintain perfect credit for two years after the discharge for a bankruptcy and three years after the final date of disclosure for a foreclosure.

Since you do not qualify under these terms you will not find a mortgage available in today's market. An exception to this might be a hard-money lender, who may offer a loan, but at high rates.

Work on maintaining perfect credit and building up your credit score. Alternatively, if the other party you mentioned can qualify alone for new loan, follow that tactic.
Joe M.
Longmont, CO  |  November 03, 2011
I am renting a house and received a notice of hearing to forclose on the house. I have been paying my landlord faithfully every month my rent. I contacted himn and he sais everything is fine and to just continue making my monthly payments. he is scheduled to appear on the 17th of November. I am in shock since I did not know any of this was happening and I may be out with 4 kids. Do I have any rights? Who do I contact? Do I get the cash for keys or does my landlord get it? I honestly cannot afford to move right now.
Bills.com
November 04, 2011
Please see the Bills.com resource Foreclosure Tenant to learn more about the Protecting Tenants at Foreclosure Act of 2009. Ask any follow-up questions you may have on that page.
Asia D.
Lakemore, OH  |  November 02, 2011
I am in the middle of a divorce that won't be final for at least a year or more. Our primary home in Ohio is worth very close to what we owe, about $110K. It is deeded in my name only, but my husband and I are both on the mortgage. HE also owns another property with no mortgage in the same state worth around $250K. I own a mobile home in FL worth about $45K with no mortgage. If we let our primary home go into foreclosure, will our other homes (or bank accounts) be at risk if there is a deficiency balance?
Bills.com
November 02, 2011
In theory, yes. See the Bills.com resource Collections Advice to read an overview of your rights and liabilities. See also Foreclosure On One Property Affect Another We Own for a discussion of your issue.
Gail D.
Wilmington, NC  |  October 25, 2011
I bought my house in 2007 for $198,000. I lost my job due to the economy in Feb. 2010 and have been unemployed ever since. I kept up my mortgage payments for over a year as I had someone living with me, but that ended nearly a year ago and can no longer afford the mortgage. I do have unemployment benefits, but they are due to expire soon and the amount is only equal to my mortgage payment, which means I would have no money for food, meds, utilities etc. if I payed the mortgage. I spoke to a realtor at that point and learned I am under water and would incur about $20,000 in out of pocket costs to sell. So, I stopped paying my mortgages in June 2011 - there are two actually, one for 80% and one for 15% of the purchase price. My lender had suggested this to avoid MIP. I am over 60 and don't have high hopes of finding another job after all this time, especially one that could afford the house. I do have some retirement money in an IRA, but it doesn't make sense to use it trying to save my house as I will need it to supplement my SS and still wouldn't be able to afford to keep the house. Keeping my house is just not a viable option. Do I let the bank foreclose, try a short sale, try a deed in lieu? I am still living in it and it was and is my primary (and only) residence. I have no other debt.
Bills.com
October 26, 2011
If your loans are non-recourse loans, then you can walk away without liability, so first determine if they are recourse or non-recourse loans.

If they are recourse loans, then try negotiating a short sale with the lenders, attempting to get them to forgive any deficiency balance, perhaps in exchange for a small settlement.

Consult with a bankruptcy lawyer, too. Find out if you are eligible to discharge any responsibility for the mortgage. If you are, that can strengthen your negotiating a settlement with your lenders, even if you choose not to file for bankruptcy.
Susan S.
Macon, GA  |  October 24, 2011
My brother and I hold 50% interest in a home that is going into foreclosure, we are NOT a party to the loan on this property, can the bank come after us? and what happens to our interest in the property if it should foreclose?
Bills.com
October 24, 2011
There are not enough facts in your message for me to formulate an answer. Consult with a lawyer in your state who has experience in real property law. He or she will research your issue, and advise you precisely.
Laura M.
Plumas Lake, CA  |  October 18, 2011
My husband and I have been basically living paycheck to paycheck and surviving in California. He recently lost his job. When he is able to secure another job he will be making less money. We have been trying to hold onto our home but it needs several costly repairs (roof, bathrooms, foundation) and we have finally hit the point where we are underwater. This is the first month I am considering not paying our mortgage because if we have to move we need to have a first, last, deposit saved up. I am afraid to tell my mortgage company the situation we are in because they may foreclose sooner. Any advice?
Bills.com
October 18, 2011
I have four reading assignments for you at Bills.com that will explain your rights, liabilities, and options to foreclosure:

Ask any follow-up questions you may have on the appropriate pages.

Michelle P.
Marlboro, CT  |  October 09, 2011
We have been discharged from our mortgage in chapter 7 bankruptcy over 5 yrs ago and have continued to pay our mortgage (not reaffirmed) to keep from foreclosing. Are credit has greatly improved and we are eligible to buy a home with a VA loan. Our credit report shows that we owe a zero balance on this mortgage and that it was discharged in the bankruptcy. We want to walk away and buy a cheaper home. I was told that even though we do not own on this house our names would show up on the deed and it would hinder the process of the VA loan. Should we wait for a foreclosure? and if we do, will this show up anywhere and hinder our process as well?..or will they not be able to report it b/c of the bankruptcy? Feels like we are between a rock and a hard place. What is your advice?
Bills.com
October 10, 2011
Details matter, and will determine if you can achieve your goal of buying the new house. You used the pronoun "our" in your message often, which makes it impossible for me to answer your question with any precision.

Let us assume for a moment your present home is encumbered by a loan in your name alone, and you alone filed for bankruptcy. In this situation, your spouse, assuming he or she is the veteran, can apply for a loan to purchase the new property. Because you are saddled with the old property, your debt-to-income ratio, or any damage to your credit score caused by a foreclosure is irrelevant to your spouse's application.

Now let us assume different facts. Let us say that both you and your spouse have a joint loan for your present property, and both of you filed for chapter 7. In this situation, if one or both of you apply for a new mortgage loan, you almost certainly will need to disclose the existing loan. You have no legal liability for the loan, so it should not impact your DTI ratio calculation. However, the mortgage underwriter may insist on including it in your DTI calculation despite your (correct) arguments to the contrary. If the underwriter includes the existing loan, then your high DTI will almost certainly push your application into the "No" pile.

Allowing a foreclosure will impact the credit score of the spouse or spouses listed on the loan. Therefore, it is not in your best interest to allow a foreclosure, or a short sale, before applying for another home loan.

What to do if you are both listed on the existing loan? Apply for a new loan now and do not list the existing loan in your liabilities. This is not misleading because the bankruptcy discharge removed your personal liability for the loan.
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Michelle P.
Marlboro, CT  |  October 10, 2011
The house is in both of our names and we were both discharged from the debt. Just to be clear, you are saying apply for a mortgage before foreclosure and it will be the discretion of the underwriter to decide if he will include the debt in our DTI? ...and even though the mortgage was discharged, a foreclosure will affect our credit?
Bills.com
October 10, 2011
Regarding your credit score, see the Bills.com resource Short Sale, Foreclosure & Your Credit Score.

I agree the chapter 7 stripped the personal liability — the note — for the mortgage. However, I am not a mortgage underwriter, and how the mortgage originator views the bankruptcy is not something I will predict. Apply and return here to share the answer.
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