Foreclosure and Your Home: Understanding the Process, Your Rights, and Your Options

By Amy Loftsgordon, Attorney

Most people don’t have enough money to buy a home outright, and instead, take out a loan from a bank or mortgage company to finance the purchase. In exchange, the borrower promises to comply with a monthly payment schedule and agrees that the lender can sell the property at a foreclosure sale if the borrower falls behind. If you find yourself in such a predicament, don’t panic—you have options. Homeowners have legal ways to avoid losing a house in foreclosure.

(Find out about the role of your loan documents in the foreclosure process by reading Understanding Foreclosure: Your Loan and Foreclosure Documents Hold the Answers.)

The Foreclosure Process

If you breach your mortgage contract, the lender cannot simply evict you from the home and take possession of the property. The bank generally must sell the house through one of two foreclosure processes: a judicial or a nonjudicial foreclosure.

A judicial foreclosure is available to lenders in every state and begins after the lender files a lawsuit in the court. Once served, the homeowner can respond to the complaint. Each side can then request evidence from the other side (in legal jargon, called “discovery”). After completing the discovery process, the case will go to trial. If the court approves the foreclosure, the lender can sell the home at a foreclosure sale.

By contrast, nonjudicial foreclosure is not available in every state—and the bank does not need court approval to sell the house. Instead, the lender must follow a series of steps that vary from state to state, such as mailing a notice of default to the borrower and providing the borrower with a certain amount of time to bring the loan current. The property will be offered at a foreclosure sale after the lender completes all state requirements. (Learn more about the different types of foreclosure in What’s the Difference Between Judicial and Nonjudicial Foreclosures?)

Federal Laws That Protect Homeowners

Federal law protects homeowners facing foreclosure, no matter where the foreclosure occurs. Here are examples of provisions that might give you time to bring your loan current, strengthen your financial situation, or help you avoid foreclosure altogether.

Foreclosures Postponed for 120 Days

Under federal law, the mortgage servicer—the company that accepts your monthly payment and that manages the loan account—generally can’t officially begin a foreclosure until the payment is more than 120 days past due. The 120-day rule gives the borrower time to “reinstate” the loan by paying the overdue amounts (plus fees and costs) or submit a “loss mitigation application” (an application for a foreclosure avoidance option).

The Servicer Must Work With the Borrower

After the borrower falls behind on payments, the mortgage servicer must attempt to discuss foreclosure avoidance with the borrower no later than 36 days after the delinquency. Within 45 days, the servicer must provide foreclosure options in writing and its staff must be available by telephone to discuss the borrower’s account and payment history.

The Lender Can’t “Dual Track” the Borrower

If the borrower submits a loss mitigation application more than 37 days before a foreclosure sale, the foreclosure can’t begin or go forward. The law prevents the lender from “dual tracking,” which means that the bank can’t continue the foreclosure process and consider your loss mitigation plan at the same time. Here’s what must happen before the foreclosure process can proceed:

  • the servicer must notify you that you don’t qualify for a mortgage workout (and any appeal period must have expired)
  • you must turn down the loss mitigation options that the servicer offers, or
  • if you have already accepted a loss mitigation offer, you must have defaulted on the agreement (failed to pay according to the agreed terms).

So, if the lender offers you a trial period before permanently modifying the mortgage (usually three months in length), make sure to make your payments on time. If you don’t follow the modification terms exactly, the servicer will be free to proceed with the foreclosure.

Options to Avoid Foreclosure

Many people want to keep their homes, if possible—and with all the time afforded by federal law in most cases, it often makes sense to try to secure a loan modification. A mortgage modification is a permanent change to one or more of the terms of the original loan. For instance, a modification might reduce the monthly payments to a more affordable level by lowering the interest rate or extending the loan repayment period. A mortgage modification is a good option if you’ve recovered from a financial hardship but your income is less than it was before you fell behind on your payments.

Here are some of the other loss mitigation options that might be available to you:

Repayment plan. With a repayment plan, you agree to catch up on the loan by paying your regular monthly payments along with an additional approved amount. A repayment plan is usually easy to arrange with the lender because it doesn’t change the terms of the loan.

Forbearance plan. A forbearance plan is similar to a repayment plan because the borrower repays the arrears over time. However, this type of arrangement might temporarily reduce or suspend the monthly payment to give the homeowner time to recover from the current financial hardship.

Temporary reduction in interest rate. A lender might be willing to reduce the interest rate to the market rate for a short period if the borrower can resume paying the full rate within a reasonable time.

Short sale or deed in lieu of foreclosure. Short sales and deeds in lieu of foreclosure are two ways to give up the property without going through a foreclosure. With a short sale, you sell the home (with the lender’s permission) for less than the amount owed on the loan. In a deed in lieu of foreclosure, the borrower voluntarily agrees to sign over (convey) title to the home to the lender.

For more detailed information about alternatives to foreclosure, see Homeowner's Options When Facing Foreclosure. If you believe that the bank isn’t following the law, or if you have other foreclosure questions, an attorney can review your situation and advise you of your options.

Questions for Your Attorney

  • What should I do if the mortgage servicer won’t review my loss mitigation application promptly?
  • What should I do if the servicer is dual tracking my loan?
  • Should I consider completing a short sale or deed in lieu of foreclosure if the bank is threatening to foreclose?
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