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Stages & Phases of Foreclosure

Foreclosure is the sequence of legal proceedings by which a lender sells or repossesses a home when the homeowner has stopped making payments on the mortgage. As a homeowner, understanding the individual steps of the sequence is critical to understanding your rights and responsibilities along the way.

These days, very few states require the lender to take the homeowner to court to foreclose on the home. The process in most states is known as nonjudicial foreclosure.

Stage One: Missed Payments

In most states, a homeowner must fall 90 days behind on their mortgage before the mortgage lender can legally initiate the foreclosure process. So if you have missed fewer than three payments, you’re not actually in foreclosure. However, this phase is very important, because (a) you have to go through it before the foreclosure process can start, and (b) this is the phase in which you as a homeowner have the most options at your disposal.

If you are in the missed payment stage, this is the best time to rework your finances, to call your lender to work out a compromise, and to put your home on the market for a fast sale.

Stage Two: Pre-Foreclosure

Once a homeowner’s mortgage payments have not been made for at least 90 days, the lender records a public notice that the owner has defaulted on their mortgage, and then mails the notice to the homeowner. In some states this notice is called a Notice of Default (NOD); in others, it is a Lis Pendens. Depending on the law in your state, the lender might be required to post the notice on your front door.

This pre-foreclosure stage is really a grace period; it gives a homeowner three calendar months to “cure” your default. What’s the cure? You can either work out an arrangement with the lender, sell the place or come up with the cash you owe.

Stage Three: Auction

If the default is not cured within three months after the Notice of Default is issued, the lender or their representative (the foreclosure trustee) sets a date for the home to be sold at an auction called a Trustee Sale. The Notice of Trustee Sale is recorded with the County Recorder’s Office, delivered to the homeowner, posted on the door of the property and published in a local newspaper — to make sure everyone knows when and where the auction will be.

This auction is either held on the steps of the county courthouse or in the trustee’s office. In many states, the homeowner has the “right to redemption” (he can come up with the outstanding cash and stop the foreclosure process) up to the moment the home is sold at the auction.

At the auction, the home is sold to the highest bidder. The big catch is that these auctions require cash payment in most states; few third-party buyers can afford to bring enough cash to the courthouse to pay in full. As a result, many lenders either simply ink an agreement with the homeowner to take the property back (called a deed-in-lieu of foreclosure) or buy it back themselves at the auction.

Stage Four: Post-Foreclosure

If a third party has not purchased the property at the foreclosure auction, the lender takes ownership of it. Then, the property becomes what is called a bank-owned property, also known as REO, short for Real Estate Owned (by lender).

REOs are sold in one of two ways. Most often, they are listed with a local real estate agent for sale on the open market; they are usually put on the multiple listing service (MLS) so that local buyers’ agents can show and sell the property to a qualified buyer for a commission. Some lenders prefer to sell their REO properties at an REO liquidation auction, often held in auction houses, at convention centers or at the property.