Understanding the Foreclosure Process

Each state has its own laws regarding foreclosures. For example, there can be differences in the laws and rules that specify when notices should be mailed or posted, redemption periods and the scheduling issues surrounding auctions of property.

If you are concerned that you may miss a mortgage payment, you need to understand the foreclosure laws and processes of your state. In any event, there are some general principles of the foreclosure procedure addressed in this article that will help you with questions you may have.

Let's say you miss a mortgage payment.

You may wonder how long a bank will take before starting a foreclosure proceeding. Generally, lenders start the foreclosure process within 3 to 6 months after you miss the first mortgage payment. And usually, it is closer to the 3 month timeline.

By the time a lender makes a demand for mortgage payments, in most cases it will have already tacked on late fees and penalties, usually after about 10 to 15 days. Nevertheless, most lenders realize that you may be facing a recent financial hardship that may resolve itself. If you believe you will miss a payment, it is better to speak with the lender before doing so to see if you can get a grace period prior to the adding on of fees and penalties, or a lawsuit.

Once you miss a mortgage payment, usually after 30 days, the bank will find you in default, and this will escalate the process. Not keeping in touch with the bank or ignoring the phone calls of the bank decreases your chances of getting a grace period or working something out with the bank.

So speak with your lender and also attempt to contact a trusted federal or state government agency (see below) that can provide counseling with regard to missed mortgage payments and foreclosures.

Counseling can help you identify different alternatives and solutions that may exist.

Different Types of Foreclosures

Generally, there are three types of foreclosures that can occur: judicial, power of sale and strict foreclosure. Each type of foreclosure requires a public notice as well a notification to the borrower of the proceeding.

Judicial Foreclosure

All states allow this type of foreclosure, and some require it. The lender files suit with the judicial system, and the borrower will receive a note in the mail demanding payment.

The borrower then has only 30 days to respond with a payment in order to avoid a foreclosure proceeding. If a lender can prove that a borrower owes money, it can seek a judgment. And the mortgage property could be be sold through an auction to the highest bidder, carried out by a local court or sheriff's office.

Power of Sale

This type of foreclosure, also known as statutory foreclosure, is allowed by many states if the mortgage includes a power of sale clause. After a homeowner has defaulted on mortgage payments, the lender sends out notices demanding payments.

Once an established waiting period has passed, the mortgage company, rather than local courts or sheriff's office, carries out a public auction.

Non-judicial foreclosure auctions are often more expedient, though they may be subject to judicial review to ensure the legality of the proceedings.

Strict Foreclosure

A small number of states allow this type of foreclosure. In strict foreclosure proceedings, the lender files a lawsuit on the homeowner that has defaulted.

If the borrower cannot pay the mortgage within a specific timeline ordered by the court, the property goes directly back to the mortgage holder.

Generally, strict foreclosures take place only when the debt amount is greater than the value of the property.

Once properties are sold through an auction, families have a small amount of time to find a new place to live and move out before the sheriff issues an eviction.

Keep in mind, your bank does not want to own your house, as this often creates more problems for lenders than it solves. If a foreclosure seems to be on the horizon, with a little knowledge and timely action, you may be able to halt the process before it goes too far.

Ten Tips to Prevent Foreclosure

Here are tips from the U.S. Department of Housing and Urban Development (HUD) if you have trouble making mortgage payments:

1. Don't ignore the problem. The further behind you become, the harder it will be to reinstate your loan and the more likely you will lose your house.

2. Contact your lender as soon as you realize you have a problem. Lenders do not want your house. They have options to help borrowers through tough financial times.

3. Open and respond to lender mail. The first notices you receive offer good information about foreclosure prevention options that can help you weather financial problems. Later mail may include important notices of pending legal action. Failing to open mail is not an excuse in court.

4. Know your rights. Locate your loan documents and read them so you know what your lender can do if you don't make payments. Learn the foreclosure laws in your state (every state is different) by contacting the State Government Housing Office.

5. Understand the options. Valuable information about foreclosure prevention (also called loss mitigation) can be found online.

6. Contact a HUD-approved housing counselor. HUD funds free or low-cost housing counseling nationwide. Housing counselors can help you understand the law and your options, organize your finances and represent you in negotiations with your lender, if you need this assistance. Find a HUD-approved housing counselor near you.

7. Prioritize spending. Keeping your house should be your first priority after healthcare. Review your finances and see where you can economize. There may be optional expenses you can eliminate such as cable TV, memberships, entertainment. Delay payments on credit cards and other "unsecured" debt until you pay your mortgage.

8. Use your assets. Do you have a second car, jewelry, a whole life insurance policy or other assets you can sell to help reinstate your loan? Can anyone in your household get an extra job to bring in extra income? Even if these efforts don't significantly increase your income, they demonstrate to your lender that you are willing to make sacrifices to keep your home.

9. Avoid foreclosure prevention companies. Don't pay unnecessary fees for foreclosure prevention. Use the money to pay the mortgage instead. Companies may contact you promising to negotiate with your lender. While these may be legitimate businesses, some charge a hefty fee for information and services your lender or a HUD housing counselor can provide free.

10. Don't lose your house to foreclosure scams. If a firm claims they can stop your foreclosure immediately if you sign a document appointing them to act on your behalf, you may well be signing over the title to your property and becoming a renter in your home. Don't sign legal documents without reading and understanding the terms and getting professional advice from an attorney, trusted financial professional or HUD housing counselor.