What happens when a house goes into foreclosure?

When does a home go into foreclosure?

A home goes into foreclosure after the borrower falls behind on the mortgage and the lender starts the legal process to sell the property to repay the loan. Under federal mortgage servicing rules, a servicer generally can't make the first notice or filing for foreclosure until you're more than 120 days behind. Before then, you'll usually get late notices, calls, and information about options to catch up.

Other debts can also lead to foreclosure in some cases. Unpaid property taxes can lead to a tax sale, and in some states an HOA can foreclose on its lien for unpaid assessments.

During those early months, the servicer is generally required to try to contact you and tell you about options to avoid foreclosure. Answer those calls and letters. A complete application for help, submitted early enough, can trigger federal protections that limit the servicer from moving ahead with a sale while it reviews your application.

What happens when a house goes into foreclosure: the stages

Every state sets its own process, but most follow this general path.

Throughout this process, you generally keep living in the house and remain responsible for it, including taxes, insurance and upkeep. The house doesn't become the lender's until the sale is completed, and in some states not until a redemption period ends.

• Missed payments and late fees: the servicer contacts you about the delinquency and loss mitigation options
• First legal step: a notice of default or a foreclosure lawsuit, depending on the state
• Notice of sale: the sale date and place are published or posted as state law requires
• Foreclosure sale: the house is auctioned, and the lender often bids the debt if no one bids more
• After the sale: in some states, a redemption period; then the new owner takes possession

Judicial and nonjudicial foreclosure

In judicial foreclosure states, the lender files a lawsuit and a judge must approve the foreclosure before a sale. You'll be served with court papers and have a deadline to respond. In nonjudicial states, the lender follows a notice process set by state law under a power of sale in the deed of trust, without going to court unless the borrower sues.

The type of foreclosure affects how long the process takes and what rights you have along the way. Look up your state's process or ask a HUD-approved housing counselor or attorney. Don't ignore court papers; missing a response deadline can lead to a default judgment.

Some states also require mediation or a meeting between the borrower and the lender before a foreclosure sale. If your state offers foreclosure mediation, it can be a useful chance to negotiate an alternative with someone neutral in the room.

What happens to your house in foreclosure after the sale

At the auction, ownership passes to the highest bidder or, often, back to the lender. If you're still living there, the new owner must follow your state's legal eviction process; they can't simply change the locks without a court process in most places. Tenants living in a foreclosed house may have rights to notice under federal and state law.

If the house sells for more than the debt and costs, the surplus may belong to you, but you usually have to claim it. If it sells for less, some states allow the lender to seek a deficiency judgment for the difference, and others limit or bar it.

Before you move out, take photos, collect your belongings, and keep a forwarding address on file with the court and the servicer so you receive any notice about surplus funds.

What happens if you let your house go into foreclosure

Some homeowners wonder whether they should simply let the house go into foreclosure. It's a real choice, but understand the costs. A foreclosure stays on your credit report and can make it harder to get a mortgage or rent for years. You may lose any equity, since auction prices can be low and fees add up. You may still owe a deficiency where state law allows it, and forgiven debt can sometimes be taxable.

Alternatives such as a sale, a short sale or a deed in lieu of foreclosure often do less damage. Talk with a housing counselor before you decide to let the house go.

How to stop a house from going into foreclosure

The earlier you act, the more options you have. Contact your servicer as soon as you know you'll miss payments and ask about every option they offer.

Whatever you choose, get the servicer's answers in writing, keep copies of everything you send, and follow up if you don't hear back. Missing paperwork is one of the most common reasons loss mitigation applications stall.

• Reinstatement: pay the past-due amount, fees and costs to bring the loan current
• Repayment plan or forbearance: catch up over time or pause payments temporarily
• Loan modification: change the loan's terms to make payments affordable
• Sell the house: pay off the loan at closing and keep any equity
• Short sale or deed in lieu: end the loan with the lender's agreement if you owe more than the house is worth
• Bankruptcy: affects foreclosure in specific ways; talk to an attorney

Selling a house that's going into foreclosure

If you can't keep the house, selling before the foreclosure sale is often the best way to protect your equity and credit. You generally remain the owner until the sale, so you can accept an offer and close as long as the payoff is covered or the lender approves a short sale. The key is time: the closing has to happen before the sale date, so a buyer who can close without a loan can help.

Ask the servicer for a payoff statement, tell the title company about the foreclosure right away, and keep the servicer informed of the sale. Whether a pending sale postpones the auction is the servicer's decision.

If you have equity, selling while the house is in foreclosure may be the difference between walking away with money and walking away with nothing. Even if you don't, a sale or short sale can end the process on terms you've agreed to, rather than on the auction's terms.

How a foreclosure affects your credit and taxes

A completed foreclosure is reported to the credit bureaus and typically stays on your credit report for years, alongside the missed payments that led to it. It can make it harder to get a new mortgage, rent an apartment, or get favorable rates on other credit. Alternatives like a short sale or deed in lieu are also reported, but some lenders and programs treat them differently, so ask.

If the lender forgives part of the mortgage debt, whether through a foreclosure, a short sale or a deed in lieu, the forgiven amount can be taxable income in some cases, and the lender may send you a Form 1099-C. Exceptions and exclusions may apply depending on your situation and the tax year. IRS Topic 431 explains the basics, and a tax professional can tell you whether it applies to you.

Avoid foreclosure rescue scams

People in foreclosure are targeted by scams. Be wary of anyone who asks for fees up front, tells you to stop paying your lender or stop talking to them, asks you to sign over the deed while you "rent it back," or promises to stop the foreclosure no matter what. Free help is available from HUD-approved housing counseling agencies.

If someone contacts you after seeing your foreclosure in public records, take your time. Check who they are, get everything in writing, and have a housing counselor or attorney look at any document before you sign it.

If your house is in foreclosure: selling to Prominent

If your house is in foreclosure and you've decided to sell, Prominent Cash Offer buys houses directly, as-is. Share the address and the sale date if there is one; if the property is a fit, you'll get a written cash offer with the amount and terms spelled out. There are no fees or commissions, we pay the closing costs, and you choose the closing date. There's no obligation, and we'd encourage you to speak with a housing counselor too.