A foreclosure is the seizure and subsequent forced sale of a home by a mortgage lender when the homeowner has failed to make timely mortgage payments.
Most homeowners do not have thousands of dollars in their bank accounts to purchase homes in cash. Instead, they typically rely on banks to finance a large portion of the purchase price of the home. When a bank finances some of the purchase, the owner and the bank enter into a mortgage contract. The term "mortgage" is the formal title for a home loan. Each month, the owner will be required to make mortgage payments toward the remaining loan balance plus interest. Interest rates vary depending on income and credit score.
Due to a variety of uncontrollable factors, many homeowners find themselves struggling to pay their bills each month. When a homeowner has missed a certain number of mortgage payments in a row, the bank then begins the foreclosure process. When the foreclosure has finalized, the bank seizes the home, even if the homeowner still had some equity in the home.
- Month Zero: You are struggling to make your payments, but you are still current. You have to juggle bills, cut expenses, and work extra hours. You hope you can make things work, so you do not call the lender to explain your financial situation.
- Month One: Your debt has finally caught up to you, and you cannot afford your mortgage payment this month. Maybe you have unexpected expenses or you lost your job. The bank will likely call you or send you a letter reminding you of your payment. Late fees begin to accrue.
- Month Two: You are still unable to pay this month’s payment, let alone last month’s payment. Your phone begins ringing off the hook. You are nervous or embarrassed and refuse to answer any of the bank’s calls. You try to push the issue out of your mind. Late fees continue to accrue.
- Month Three: You watch as 90 days of due payments accumulate without possessing any ability to pay. You receive a letter in the mail titled “Notice to Accelerate” from the bank that says that you must pay a certain amount of money to the bank within 30 days or your entire outstanding balance will be accelerated. This means the remaining mortgage will be due immediately, in full, at the end of the 30-day period. Late fees continue to accrue.
- Month Four: The due date for the Notice to Accelerate has passed, and you still have not made a payment. The bank will then assume you have no plans to make a payment and will refer your account to the legal department. Now the legal foreclosure process begins. The lawyers in the legal department will file a foreclosure action in state court. Late fees continue to accrue.
- Notice of Sale: Depending on your jurisdiction, how fast the courts work, and whether you make any arrangements with the bank, your house will be listed for sale. The bank now owns your home and wants to sell it to get as much money out of it as possible. You will receive a notice in the mail and taped to your door, advising you of this sale. Despite the notice of sale, you still have the opportunity to negotiate with your lender and to prevent the sale.
- Redemption: While your home is in the process of being sold following the foreclosure, you still have a limited period of time to reclaim your home by paying all outstanding costs. This is known as the redemption period. When the redemption period ends, the new owner will move in, and your claim to the home will be lost forever.
Foreclosure is an incredibly stressful, traumatic, and trying process, but it can be prevented with the assistance of a foreclosure attorney. An attorney can counsel you on how to negotiate a new payment plan or stave off foreclosure.