The protections put in place after the 2008 financial crisis had a tremendous impact on the foreclosure process by laying the groundwork for a healthier and more transparent relationship between the lender and homeowner. When the COVID-19 pandemic threatened homeowners financially, the federal, state and local governments and agencies, as well as loan servicers and lenders, worked doggedly to prevent a repeat of that earlier housing crisis. These measures have included:

• federal: a forbearance period and moratorium on foreclosures for federally backed loans;
• state and district: forbearance, moratoria and additional protections that vary by region;
• loan servicer and lender: lender-specific forbearance and moratoria, with nearly all lenders extending some sort of assistance to homeowners struggling to pay.

Foreclosures in-process have been impacted too, with postponements and cancellations of in-person events due to COVID affecting scheduled court hearings and auctions.

Much of foreclosure prevention is about getting help before the time runs out to act and, though those times have been extended in some cases, the threat is still there. This article will inform you about the foreclosure process and the types of assistance your lender and others can provide if you are in financial distress and worried you might lose your home.

What Is Foreclosure?

When we take out a mortgage to buy a house, we use the home as collateral for our legal agreement with the mortgage company. In exchange for the money the lender puts up for the home purchase, we agree that we will adhere to certain terms, including a payment schedule. If we fail to abide by the terms, the lender can follow a sequence of legal procedures to sell the home so they can recoup the outstanding amount of the mortgage, plus expenses incurred in the collection process. This legal process is foreclosure.

Missed mortgage payments are the most common reason to be threatened with foreclosure, but other activities that violate your mortgage terms can also result in foreclosure. Though it seems like an easy situation for a homeowner to fall into when facing financial hardship, it is not a desirable state of affairs for the bank, and many lenders will go to great lengths to avoid it. Perhaps most important from the homeowner's perspective: Foreclosure is not instantaneous. It requires the lender to proceed through a series of steps before the home is sold at auction. In this article, we will discuss what the foreclosure process entails, what you can do to stop it and who can help.

Foreclosure Stages

As we mentioned, foreclosure is not an instant state of being: It proceeds through four or five stages, with everything before auction representing an important pre-foreclosure period when you have many opportunities to stop it. Federal law, state law and your own mortgage documents govern the process, so the foreclosure timeline will vary widely. All told, it can take as little as six months or more than two years from your first missed payment to the foreclosure auction.

Stage One: Missed Payments

In the initial stage, your mortgage payment is due, and you miss it. And then maybe you miss another payment and another. During this period, the bank will likely:

• Make contact. According to federal mortgage servicing rules, in most cases, the bank must try to reach you on the phone by day 36 of delinquency and by mail prior to day 45 to explain what you owe and inform you about loss mitigation options. Loss mitigation is industry-speak for solutions to fix your debt with the bank. We will discuss what may be on the table in the next section.
• Send scary letters. Later in the missed-payments period, if you haven't worked it out with your lender you will likely get some version of a breach letter, according to the Department of Housing and Urban Development (HUD) foreclosure timeline. This demand letter or acceleration letter will outline what you owe and give you a period of time to remedy it before the loan is accelerated and a foreclosure is initiated. The "acceleration" part is how the few thousand dollars you may have owed in missed payments becomes the entire balance of the loan.

Those federal rules say lenders must wait until after 120 days of missed payments to begin any foreclosure action on a borrower's principal residence, with few exceptions. States may stipulate a time period greater than that and particular mortgage documents could have other requirements of the lender before entering the next stage.

Stage Two: Initial Legal Filing or Notice of Default

This stage is when foreclosure is actually initiated: You haven't lost your home yet, but the requisite documents have been filed to start the process. From this initial filing stage through the auction, state law and your own mortgage documents dictate the process. Foreclosure will follow one of two general paths: judicial or nonjudicial. As to which your lender will use, all states allow judicial foreclosures but it is the standard method in fewer than half. When nonjudicial foreclosure is an option, lenders generally opt for it because it is less expensive and less time-consuming.

• Judicial foreclosure: In judicial foreclosure, the lender must prove to a court that it has the right to foreclose on the property. The lender files a lawsuit against you, the homeowner, and you are given the opportunity to raise a defense. The entire process can take anywhere from 30 days to several years to complete, depending on the court calendar, the details of the case and how ambitious you are about engaging with the process.
• Nonjudicial foreclosure: In nonjudicial foreclosure, the lender is allowed to start the process outside the court system because your state law and mortgage agreement allows it, and the whole thing is essentially a notification process. A notice is recorded with the county that you have defaulted, and a copy of that notice may be mailed to you and posted elsewhere publicly for a period of time. The notice outlines what you can do to cure the default (pay the lender back or come to agreeable terms), the next action on the part of the lender and how long you have — anywhere from several days to several months — before the next step.

Stage Three: Notice of Sale

A separate notice of sale period occurs with most judicial foreclosures and some nonjudicial foreclosures.

• Judicial foreclosure: At this stage, a court has found on behalf of the lender at which point a notice of sale is drawn up and filed with the county that outlines the future date and location of the auction. There are a few states that allow strict foreclosure, in which the title passes to the lender as part of the court's judgment without a sale, according to HUD's foreclosure process overview.
• Nonjudicial foreclosure: Your failure to cure the default gives the lender the right to hold an auction. In some states, a notice of sale comes after the notice of default period, but others permit a notice of sale at the same time as the notice of default, or even in lieu of it.

If there is an additional period of time before the auction, it is generally a minimum of 14 days. The foreclosure process concludes with the auction.

Stage Four: Auction

An auction is held, with the minimum bid representing the amount owed to the bank plus fees, although occasionally the bidding will start for even less than that amount in order to encourage offers. The home is generally sold to the highest bidder, though in some states the lender gets to approve the winning bid. If the home doesn't sell, the lender takes possession. If the home sells to a third party, but for less than what you owe, the lender may be able to pursue you for the difference in some states. This is called a deficiency judgment. If the home sells for more than what is owed to the lender and any other lienholders, the balance goes to the homeowner.

Stage Five: Post-Foreclosure

If the lender takes ownership of property at the auction, it becomes a bank-owned or real estate owned (REO) property. The bank will later list it on the open market using a local real estate agent or sell it at an REO liquidation auction.

How to Stop Foreclosure

Foreclosure is not a foregone conclusion for homeowners in financial difficulty. There are numerous avenues to avoid it, but the important part is to start early. The opportunities available to you will be influenced by where you live, the details of your hardship, your age and other demographics, the balance owed, your mortgage document and terms, the type of lender and more. If you are a military veteran or another special category of borrower, there may be additional possibilities available through your lender or through government programs. Important to note: Many of these options will have credit and tax implications and could even increase your debt burden, so it is important to get professional guidance. We have a list of who can help in the next section.

Option: Examine Your Finances and Try to Fix Them
Any steps you can make to work out the situation yourself will put you in better stead for negotiations with your lender. Even after the foreclosure process has begun, if you are able to regain your financial footing, you may be able to reinstate your loan, whereby you pay everything overdue plus fees and expenses in a lump payment and resume your normal mortgage terms. Fixing your finances may include:

• Getting a second job or some gig work.
• Liquidating some assets.
• Using insurance if you have a mortgage protection policy or have accrued cash under a whole life insurance policy; or making a hardship withdrawal from a retirement plan.
• Renting a room, or the entire house if you have someone you can stay with until you get back on your feet and your mortgage allows the home to be rented.

Option: Sell Your Home
If you don’t see your financial situation improving in the near future, you are likely better off selling your home. Find a real estate agent who has successfully represented other homeowners you know and who has a track record of getting homes sold quickly. Be ready to price your home to move. To expand the pool of potential buyers, ask your agent about whether a lease-option or lease-purchase (rent-to-own agreements) would be worth entertaining. Also, ask your lender about a loan assumption — in which a buyer assumes your loan to capitalize on more favorable terms than currently available in the market. Selling your home could be an option right up until auction, though the process after foreclosure begins will vary state-to-state and may involve your lender.

Option: Loss Mitigation Through Your Lender
Loss mitigation is about finding a solution to pay off debt already incurred and preventing new debt from arising, and ideally, it's negotiated during the missed-payments period. Banks recognize that the solution to many financial hardships is often just a matter of time to turn things around. Besides, foreclosing is an expensive and often onerous process for the lender. A loss mitigation strategy commonly starts with a written application, but you may be able to make short-term arrangements over the phone. Options could be:

• Forbearance: Your mortgage payments are paused for a period of time. It doesn’t eliminate what you owe, it just postpones the collection of that amount. The balance is sometimes deferred until the end of your mortgage or paid back under a repayment plan or loan modification.
• A repayment plan: You agree to repay the amount you owe in regular payments over a fixed period of time or the life of the loan.
• Restructuring or modifying your loan: The terms of your mortgage are changed to lower the payments. This might be accomplished by lowering your interest rate, extending your term or forgiving some of the principal. The lender may also agree to waive fees and penalties you have incurred.
• A deed-in-lieu of foreclosure: You don't keep your house. Instead, you voluntarily hand the title over to the mortgage company. Some lenders will want the homeowner to try to sell the property first before it will accept. The mark on your credit score with a deed-in-lieu may be less than foreclosure and you're approved for new home financing quicker, according to mortgage lender Quicken Loans. You may even get a cash payment to assist with relocation costs.
• A short sale: You owe more on your mortgage than the market will pay so your lender allows you to sell the property for less than what you owe. If the lender forecloses on your home or accepts a deed-in-lieu, it is going to simply turn around and try to resell it; it may see a short sale as saving time and trouble. To avoid foreclosure with a short sale, you need to start the process early because this type of property transaction can take a long time to complete. The lender may want you to cover the difference between the sale price and the mortgage, so it's important to get professional guidance.

Option: New Financial Instruments
In a refinance, you would pay off your existing loan and assume a new loan with your current lender or another bank under more favorable terms, like lower monthly payments and a lower interest rate. Nonprofits like Neighborhood Assistance Corporation of America and governmental lenders have refinance programs for homeowners in distress. If you are over 62 and your mortgage balance is low, you might consider a reverse mortgage, which charges your mortgage payments against the equity in your home.

Option: Bankruptcy
Once you file a bankruptcy petition, federal law prohibits any debt collectors, including your mortgage lender, from continuing collection activities — even if the auction sale has been scheduled. Generally, this option just buys you more time to replace your lost job or recover from a temporary disability; it doesn’t let you off the hook for your debts. Creditors work with you on a reasonable repayment plan so you can keep your loan, or your home is sold to pay the debt.

Option: Legal Remedies
You may be learning the hard way about the lender's rights and your responsibilities under your mortgage, but it works the other way too: You have rights and the lender has responsibilities under those same documents as well as federal and state laws. In addition to forcing lenders to adhere to a specific timeline and notification process for foreclosure filings, some states give homeowners the right to mediation, according to the Consumer Financial Protection Bureau (CFPB). If the lender fails to follow the requirements, you may be able to delay the foreclosure process or challenge the foreclosure after the auction by getting a court to agree.

A Note on Recovering Your Home
If you are able to regain financial stability, the right of redemption allows you to reclaim your home if you pay back your entire mortgage balance plus fees, according to HUD. This right can be exercised right up to the auction and it will stop the foreclosure process in every state. In some states, you even have a period of time to exercise your right after auction where you would buy back the property from the bank or from the third-party purchaser for what he or she paid. You haven't stopped foreclosure, but you've managed to recover your home.

Who Can Help

The foreclosure experience can be daunting, but you are not the first person to face this difficulty. The earlier you take hold of this process the better: Before you do anything else take a deep breath, review your home purchase documents and analyze your finances. Avoiding foreclosure often involves reaching out to others, and they can be of assistance only if you can provide them with solid information. Do not pay for financial counseling. The Federal Housing Authority has a list of HUD-approved counselors and agencies in your state. These individuals serve as a reputable, objective and free alternative to the paid financial counselors in the marketplace and are a first-step option to help you figure out how to get your finances back on track.

Talk to your lender, and by that, we mean the company that sends you a bill. This is frequently a loan servicing company and not the same entity that gave you the loan. If you're unsure who your servicer is, check the Mortgage Electronic Registration Systems page to find out. The minute you realize you're going to be late on a payment, get in touch. The lender is in no way required to foreclose on a property in default, and most are highly motivated to work out a solution other than foreclosure, especially if you inform them early of your difficulty. Prepare a clear explanation of the financial hardship, being honest about your situation without exaggeration or understatement, so that any potential solution will be realistic for your circumstances. Check your servicer's website for a financial hardship resource page, as many have information about who to contact as well as their processes and what information you'll need to gather together before reaching out. According to the CFPB's foreclosure factsheet, federal guidelines say that if you respond to the lender with a complete loss mitigation application by the appropriate deadline, then the lender has to try to work with you. And after the missed-payments period, the lender cannot pursue foreclosure at the same time it is negotiating a loan modification (called dual-tracking). Aside from the legal imperative, it is to any bank's benefit to work something out to get money back from you instead of spending money on foreclosure proceedings. But the bank must have faith that working with you is to its benefit. Otherwise, it may decide foreclosure is the safer option to minimize loss. That means you need to reach out early and engage in the process.

Consult an experienced real estate broker, tax professional and attorney before signing anything. If you've examined your purchase documents, you have undoubtedly learned about aspects of your mortgage that you wish you had understood beforehand. Many options to avoid foreclosure come with their own potential tax, credit and financial liabilities if not executed properly. The HUD-approved counselor can help link you with relevant professionals in your area. The Legal Services Corporation has a local legal aid office finder. Visit LawHelp.org for other nonprofit legal services in your state.

There is federal, state and local help for homeowners in financial difficulty, sometimes through temporary measures but also more permanent assistance. Check the current federal protections available by visiting the HUD website. There you will also find a directory of state government housing offices and local foreclosure resources. Freddie Mac has a useful guide on sustaining homeownership in a crisis. It is important to know the typical foreclosure process and timeline in your state, and foreclosure resource RealtyTrac has a helpful summary of all of them.

Who Cannot Help: Foreclosure fraud is rampant as homeowners overwhelmed by financial difficulty make easy targets for fraudsters. Learn about the common scams and how to protect yourself in the Beware of Mortgage Rescue Scams brochure from the FDIC and at NeighborhoodWorks America.