Home Foreclosure Process

The home foreclosure process begins when a homeowner is unable to pay his or her mortgage. The majority of Americans borrow money to pay for their homes, in the form of a mortgage. This means the bank co-owns the home. Since mortgage debt is secured debt, if a homeowner is unable to pay his mortgage bill, the bank can take the asset that secures the debt: the house. However, the bank cannot simply walk into the house and demand that a non-paying homeowner leave.

Understanding the Foreclosure Process

The bank must follow appropriate legal steps in order to foreclose on a home. This can be a long and complicated process, which is costly for both the bank and the homeowner. Many banks are willing to negotiate, or agree to a short sale, in order to avoid foreclosing on a home. If negotiations are not possible and a homeowner simply cannot or will not pay, the foreclosure process can continue for months, until the bank ultimately owns or sells the home and the homeowner is evicted.

State law regulates the mortgage foreclosure process, and there are slight differences from jurisdiction to jurisdiction. Despite these differences, the foreclosure process is very similar throughout the United States, and tight regulations ensure that banks must carefully follow the law in order to avoid violating homeowners' rights.

Typically, a customer enters into a pre-foreclosure state as soon as they miss their first mortgage payment. Most late payments do not lead to foreclosure, but a single late payment is always the first step in the process.

When the bank does not receive the payment on time, they send a late notice to the customer. The late notice may also inform the homeowner of the fees and penalties assessed for the late payment. If the customer resumes payment at this point, paying the missed payment and late fees, the home foreclosure process does not continue.

If a customer continues to miss payments, the bank will begin to contact them via phone or writing to attempt to understand and resolve the situation. The bank must follow fair debt collection practices during this period, which means the bank cannot call before or after certain hours, and cannot discuss the unpaid debt with relatives or employers.

If a customer continues to miss payments and does not come to an agreement with the bank, the bank will issue demand for Payment in Full. This demand requires full payment of the total remaining balance owed on the mortgage debt. It is legal for the bank to make this demand in most states because mortgages contain "acceleration clauses." The acceleration clauses state that if a customer misses payments, the bank can "accelerate" the loan or demand full payment at any time.

Once the bank demands full payment under the acceleration clause, in most cases it is too late to resume regular monthly payments. A homeowner may be able to reinstate the loan and avoid paying the full balance, but there will usually be hefty fees associated with the reinstatement. Furthermore, late fees and legal fees are assessed in order to reinstate the loan, if this is an option at all.

If the homeowner is unable to pay the full balance owed, plus the late fees, legal feels, and back interest, the bank will begin the formal, legal portion of the home foreclosure process.

While the exact requirements and rules vary by state, typically after they make the demand for payment the bank will send an official Notice of Intent to Foreclose to the delinquent homeowner. The bank must "serve" the homeowner with these papers officially, either by sending them certified mail or paying a sheriff or court official to deliver them personally. In some cases, the bank must also publish legal notice of intent to foreclose in the local newspaper.

After the homeowner receives notice of intent to foreclose, there is a notice and waiting period designed to give the homeowner time to negotiate with the bank, or to prepare evidence for a court hearing. Once this notice period ends, both the homeowner and bank are expected to be present at a hearing in court in which the case will be heard.

The court will hold a formal legal hearing to evaluate the bank's claim on the home. If the bank proves that they hold the mortgage note and that the homeowner has failed to pay, the process continues.

The bank will seize the home at this point, and will advertise a legal notice of a foreclosure sale in the newspaper. This published notice will include a date that the auction will take place. They then sell the home at this auction to the highest bidder. Money earned at the auction is first paid to the bank to satisfy the debt owed, and to cover legal fees and costs. Any money left over is paid to the homeowner.

In most cases, you do not have to leave your home during this formal foreclosure process. The ownership of the home transfers to the new buyer following the foreclosure auction. After the transfer, the new owner must institute legal eviction proceedings.

The length of the foreclosure process depends upon state laws, and upon the individual lender. If a lender pursues the claim aggressively and institutes legal proceedings shortly after the first missed payment, a homeowner may find their home foreclosed on in less than two months. Usually, however, the process takes at least six months from the first missed payment.

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