Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Typically, default is triggered when a borrower misses a specific number of monthly payments, but it can also happen when the borrower fails to meet other terms in the mortgage document.

KEY TAKEAWAYS

  • Foreclosure is a legal process that allows lenders to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property.
  • The foreclosure process varies by state, but in general, lenders try to work with borrowers to get them caught up on payments and avoid foreclosure.
  • The average number of days for the foreclosure process is 673; however, the timeline varies greatly by state.

Understanding Foreclosure

The foreclosure process derives its legal basis from a mortgage or deed of trust contract, which gives the lender the right to use a property as collateral in case the borrower fails to uphold the terms of the mortgage document.

Although the process varies by state, the foreclosure process generally begins when a borrower defaults or misses at least one mortgage payment. The lender then sends a missed payment notice that indicates they haven’t received that month’s payment.

If the borrower misses two payments, the lender sends a demand letter. While this is more serious than a missed payment notice, the lender may still be willing to make arrangements for the borrower to catch up on the missed payments.

The lender sends a notice of default after 90 days of missed payments. The loan is handed over to the lender’s foreclosure department, and the borrower typically has another 90 days to settle the payments and reinstate the loan (this is called the reinstatement period).

At the end of the reinstatement period, the lender will begin to foreclose if the homeowner has not made up the missed payments.

If your mortgage is backed by the federal government and you are behind on your mortgage because of a COVID-19-related financial hardship, you may be eligible to suspend payments for as long as 12 months with no late fees.

The Foreclosure Process Varies by State

Each state has laws that govern the foreclosure process, including the notices a lender must post publicly, the homeowner’s options for bringing the loan current and avoiding foreclosure, and the timeline and process for selling the property.

A foreclosure—as in the actual act of a lender seizing a property—is typically the final step after a lengthy pre-foreclosure process. Before foreclosure, the lender may offer several alternatives to avoid foreclosure, many of which can mediate a foreclosure’s negative consequences for both the buyer and the seller.

In 22 states—including Florida, Illinois, and New York—judicial foreclosure is the norm. This is where the lender must go through the courts to get permission to foreclose by proving the borrower is delinquent. If the foreclosure is approved, the local sheriff auctions the property to the highest bidder to try to recoup what the bank is owed, or the bank becomes the owner and sells the property through the traditional route to recoup its losses.

The other 28 states—including Arizona, California, Georgia, and Texas—primarily use non-judicial foreclosure, also called the power of sale. This type of foreclosure tends to be faster than a judicial foreclosure, and it does not go through the courts unless the homeowner sues the lender.

How Long Does Foreclosure Take?

Properties foreclosed in the first quarter of 2020 (the most recent data available) had spent an average of 673 days in the foreclosure process, according to the U.S. Foreclosure Market Report from ATTOM Data Solutions, a property data provider. That’s down 19% from an average of 834 days for properties foreclosed in the third quarter of 2019.1

The average number of days varies by state because of varying laws and foreclosure timelines. The states with the longest average number of days for properties foreclosed in the first quarter of 2020 were:1

  • Hawaii (1,673 days)
  • Indiana (1,361 days)
  • Louisiana (1,243 days)
  • New York (1,226 days)
  • Florida (1,022 days)

States with the shortest average times to foreclose during the same period were:

  • Arkansas (157 days)
  • Wyoming (172 days)
  • New Hampshire (184 days)
  • Virginia (190 days)
  • Minnesota (202 days)