If you’re facing foreclosure, your head may be swimming with questions. What happens in a foreclosure? How long does foreclosure take? How long does foreclosure stay on a credit report? And, for perspective homeowners who want to try again, how long after foreclosure can you buy a house?
But if you’re facing foreclosure, there is no need to panic. The consequences of foreclosure are daunting and complex, but it’s also something that you can survive. In fact, what happens after foreclosure involves several factors completely within your control. In fact, there are many ways to get through a foreclosure and become a homeowner again in the future. None of the following content should be taken as legal advice, but this article describes the process of foreclosure and how someone can come out on the other side with relatively good prospects.
Foreclosure is a legal process that requires several steps before your home may be seized.
1. Defaulting on Your Mortgage
When a mortgage borrower fails to meet the terms of their mortgage agreement, it goes into default. Different lenders define default differently, and most mortgages include an “events of default” section that describes exactly what a homeowner or occupant does to trigger mortgage default. More often than not, however, default occurs when a homeowner fails to pay his or her mortgage for several months.
2. Receiving a Notice of Default
If a lender believes you have defaulted on your mortgage, it must provide you with notice. This notice is a legal document that must precede a foreclosure action and meet certain requirements to be valid. For example, a notice of default must explain the nature and extent of the default. It must also list the date by which default must be remedied.
3. Pursuing Potential Remedies to Default
Missing a few payments on your mortgage does not necessarily land you in foreclosure. If a borrower is in default, the mortgage lender typically may pursue a variety of options available under the terms of the mortgage. If you and your lender decide to move forward with a remedy at this stage, you can avoid foreclosure completely. After all, it’s in their best interest to avoid the consequences of foreclosure as well as yours. Before you get too far into default, consider your options:
Ask for a Forebearance
Sometimes, lenders will agree to a forebearance. This temporarily stops payments due and gives you time to catch up, but this option requires you to act fast. Lenders are unlikely to grant forbearance too long after your mortgage goes into default.
Request a Loan Modification
Your lender may work with you on some of the heavier terms of your mortgage loan. Consider asking for a lower interest rate, an extended term, or a reduced principal to lighten the financial load. However, you typically cannot modify your loan once your property has entered foreclosure.
4. Entering Foreclosure
If you’re not able to remedy the default on your mortgage, the foreclosure process begins.
What Happens When a House is Foreclosed?
What happens in a foreclosure depends on the specific laws of your state. There are two main types of foreclosure: judicial foreclosure and power of sale foreclosure. Maryland, Virginia, and the District of Colombia allow lenders to pursue either of these types of foreclosure.
Judicial foreclosure requires your lender to file a lawsuit against you. This process starts when you get a legal notice from the courts. This notice must be served to you in a timely fashion, and a lawsuit will follow according to local rules of procedure.
Power of sale foreclosures are typically only allowed if your mortgage agreement includes a “power of sale” clause. Like judicial foreclosure, this process begins with legal notice. However, this notice comes from your lender, not the court. From there, you have limited time to remedy the situation before experiencing the consequences of foreclosure.
How Long Does Foreclosure Take?
Lenders typically do not start foreclosure processes until you’re 3-6 months behind on your payments. But after you receive a notice of foreclosure, you have a very limited period of time to fix it and end the foreclosure process. In a power of sale foreclosure you typically have only 30 days from the date of the notice to the date of the auction. Judicial foreclosures can last far longer, often a year or more, if you decide to fight the matter in court.
My Home was Foreclosed on, Now What?
If you’re unable to stop the foreclosure within the time period allowed, an auction is held and the property is sold to the highest bidder. If your home sells at auction for less than what you owe on your mortgage, you may still be liable for that amount. However, if it sells for more, than you may be entitled to a cash refund. Be sure to check with your lender after the sale to see whether this is the case.
How to Stop a Foreclosure AuctionThere are several ways you can stop a foreclosure.
Sell Your Home – Fast!It is possible to sell a house in foreclosure before it goes to auction. However, you’ll have to close on the sale and repay the mortgage before the date of the auction.
Pursue a Short SaleIf your request for a loan modification is denied, consider working with your lender on a short sale. Your bank may accept a lower amount than what you owe on your home, particularly if your property value went down since you bought it. This affects your credit, but not as much as a foreclosure would so it may help you get a new mortgage after foreclosure quicker.
Filing BankruptcyIf you begin a legal bankruptcy proceeding, the foreclosure action stops. However, the consequences of bankruptcy can be even worse than the consequences of foreclosure. Call an attorney to discuss whether filing from bankruptcy may be a good idea.
Redemption After Foreclosure
If your home has been sold in a foreclosure auction, all is not lost. The law in your jurisdiction may allow for a short period of redemption. Redemption gives you the chance to reclaim your home after foreclosure. In these cases, you still have to pay the balance of your mortgage. You’re also typically responsible for the costs your lender incurred during the foreclosure process.
Redemption is a legal right in some states, but not all. For example, while it is possible to sell a foreclosed home in Virginia, state law allows no post-sale redemption period.
Consequences of Foreclosure
Losing a home is a major disruption to your life. Foreclosure also has both short- and long-term effects on your finances.
How Long Does Foreclosure Stay on Your Credit Report?
A major consequence of foreclosure is its effect on your credit report. A foreclosure stays on your credit report for seven years from the date of your first missed payment.
Buying a House After Foreclosure
It is absolutely possible to become a homeowner again after going through a foreclosure – but how long after foreclosure can you buy a house? Of course, this depends on your lender. If you’re eligible for a VA Loan, the waiting period is two years. Otherwise, even the most generous lenders require you to wait at least three years after the foreclosure has ended before you will be eligible for another mortgage.
Tips for Improving Your Financial Standing
Recovering from foreclosure takes years. In the meantime, work to improve your credit by:
- Paying bills on time,
- Paying down other debt,
- Working with a credit counselor,
- Avoiding predatory loans with high interest rates, or
- Following a credit repair process.
The Buying Process
Once you’re back on your feet financially, take care to not make the same mistakes again when buying your next home.
- Take your time – the more time you take to repair your credit, the better your options will be in the future.
- Save as much money as you can for the down payment on your next mortgage.
- Contact as many mortgage lenders as you can and research their requirements.
- Be honest – consider writing a letter explaining the hardships you went though and what you’ve done to help fix them.
- Monitor your credit and do not open any new credit accounts if you can avoid it.
- Know your limits and don’t try to buy more home than you can afford.
Having your home seized in a foreclosure action can be incredibly traumatic. But remember, you’re not alone. It happened to millions of people during the financial crisis of 2008, and it’s a problem countless homeowners struggle with today. There are many resources to help people in your situation and you can do a great deal to prevent from suffering too much from the consequences of foreclosure.