If you’ve been through a foreclosure (or know someone who has), you know it wasn’t a pretty situation—for you or the bank. You’ve lost your home, earned yourself a bad credit score, and are having trouble getting another loan. That’s rough. Now you’re probably wondering: What happens after a foreclosure?
Don’t worry, we’re here to help walk you through the process one step at a time. But first, let’s start with the basics.
What’s a Foreclosure?
A foreclosure can happen if you stop making payments on your home, property or timeshare. Don’t worry, one missed payment probably won’t set your lender off on high alert. But if you keep missing payment after payment, they’ll start the legal process of taking back their property.
Remember, if you’re making payments, your home is still owned by the bank or mortgage lender—which means they have a right to take it back. That’s why it’s so important to keep in contact with your lender if you think you’ll be missing a payment. There are options out there to help you lower your payment, especially if you have a financial hardship. Communication is key.
How Does a Foreclosure Work?
A foreclosure is a . . . process. (Insert long, slow whistle here.) And depending on the laws of your state, it can be quite the long process depending on what type of foreclosure you’re going through.
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There are three types of foreclosures, and which one you’re going through depends on the laws in your state:
- Judicial: This type of foreclosure goes through the court system (and is one of the most common types of foreclosure).
- Power of sale (nonjudicial): Your lender can put the home up for auction without the oversight of the judicial system.
- Strict: The property goes back to the lender after a court-ordered time period. In strict cases, the home is usually worth less than what’s owed on it.1
Everyone’s circumstances are a little different, but foreclosures often happen in these five stages:
1. You miss a few payments.
No one buys a house with plans to skip out on their mortgage payments (unless you’re a criminal, but that’s a different story). There are a lot of reasons for a missed payment: forgetfulness, job loss or loss of income, divorce or death of a loved one, higher interest rates, and other bills that keep piling up. No matter the reason, a few missed mortgage payments could steer you in the direction of a foreclosure. If you’ve had a life event that impacts your payments, the best thing to do is contact your lender and let them know immediately. You never know—they might be willing to give you grace for a few months until you can catch up on your payments.
2. Your lender submits a notice of default.
When you’re behind on your payments for at least three to six months, your lender will submit a notice of default to the county recorder’s office. Don’t worry, you won’t be surprised when this happens. They’ll have sent quite a few letters to you asking for payment. And when they submit the notice of default, they’ll send you a certified letter with the form too. This step is the official start of the foreclosure process. If you just received a certified letter like this, it’s not too late! A lot of the time, your lender will give you three months to get caught up and reestablish the home loan.
Remember: Communication is key! It’s not too late to stop the foreclosure in it’s tracks. Continue to communicate with your lender and let them know how much you can put toward the loan (and when).
3. Your home goes to the pre-foreclosure stage.
Now that your lender or bank has submitted their notice of default to the county recorder, your property is now in what’s called the pre-foreclosure stage. In this stage, you have about three months (sometimes longer) to get your mortgage back on track. At this point, you have a few options:
- Catch up on your payments (if you can)
- Try to sell your house in a short sale
- Sign the home over to your lender with a “deed in lieu of foreclosure”
A short sale is almost like a regular home sale. Almost. The difference is that you’re trying to sell it as fast as you can at a lower price to beat the foreclosure. Not only that but it’ll be better for the state of your finances (and your credit) if you try to sell.
These home sales are called short sales because the sale comes short of what the balance on the mortgage actually states. Note: If you do decide to go this route, your lender will have to approve the sale. In most cases, this is usually the best option for both you and your lender.
If you can’t sell in a short sale, you might decide to give the deed of your home back to the lender with a “deed in lieu of foreclosure.” With this option, you’re essentially giving up the house (and the mortgage), allowing your bank to forgo the long—and expensive—process of a foreclosure.
4. Your lender takes the home to auction.
Maybe your lender is a stick in the mud about the short sale or maybe your house just wouldn’t sell. Either way, the next step is that your home (ahem—their property) goes to auction.
Your lender will appoint a trustee to the property to take it to auction. This person will start the bid at the amount left on the balance of your mortgage, and the sale will most often go to the highest bid.
Psst. If you’re still wondering if you can turn this foreclosure around, you still can! In some states, even if the property was sold at auction, you as the homeowner still have the right to try to purchase the home. Here’s the deal though: You now have to pay the balance (and interest) plus anything your bank spent going through this process. Bummer.
5. If the house didn’t sell, it becomes real estate owned property.
If the house sold at auction, that’s great (for the lender). If not, the property becomes the full responsibility of the bank or mortgage company. Yup—taxes and all. At this point, the bank will be pretty excited to sell the property and get it off their hands (and their bottom line).
If you’re still in the home, your lender will want you out as soon as possible. Some lenders might offer you cash to leave or help you with relocation. Either way, this is the time they’ll give you the boot if they haven’t already.
How Long Does a Foreclosure Stay on My Credit?
Foreclosures can tank your credit score in no time flat. The actual foreclosure coupled with the missed mortgage payments can make a major dent in those three little numbers. In most cases, your credit report will reflect your foreclosure for “seven years from the date of the first missed loan payment.”2
Once seven years has passed, the foreclosure should fall off your report on its own. If not, you can contact your reporting agency and file a dispute.
What Happens After a Foreclosure?
Not too many people sign up for a mortgage these days with their sights set on missing payments and losing the place they called home. And if you just walked through the long and hard process of foreclosure, there’s light at the end of the tunnel. It may not seem like it now, but you can get through this.
Here are some next steps to help you as you sort through the wreckage.
1. Find a new place to call home.
Keeping a roof over your head is one of the most important things you can do for your family. So now that your home is no longer yours, it’s time to find a new place to call home. You’re most likely looking at a place to rent. Most apartments and landlords will want to see proof that you’ve been making your payments in full and on time. They’ll also do a credit check.
If the foreclosure hasn’t hit your credit report yet, you might be in luck. But no matter what, it’s important to be honest about your circumstances. Show your future landlords your proof of income, letting them know that you’re good for the monthly rent. Not only that but they might give you the chance to explain why you went into foreclosure. If the landlord is a human with a beating heart, they’ll likely (and hopefully) understand that some hardships are unavoidable. But no matter what, be honest and don’t be surprised if you have a more difficult time finding the right place to call home.
2. Take inventory.
Now that the wreckage has cleared, it’s time to start rebuilding from the ground up. If you lost a job, interest rates went up on your mortgage, medical bills piled up, or you lost your bread-winning spouse, we’re so sorry. And now that you’re in the aftermath of the storm, it’s time to take inventory of how you’re doing mentally and emotionally. Find a good counselor and work through the emotional and mental turmoil caused by your hardship so you can begin to move forward with your life.
3. Rebuild your life.
While you’re on the road toward healing, it’s time to start rebuilding your finances. Your FICO score might say one thing, but your worth and your life don’t have to revolve around the Almighty FICO. As you begin rebuilding your finances, stay far away from credit. The goal is to get to a point where you don’t need to borrow from anyone else ever again.
We have a plan that will help you dig yourself out of debt, save for emergencies, and never have to worry about your FICO score again. It’s called the 7 Baby Steps:
- Save $1,000 for your starter emergency fund.
- Pay off all debt (except the house) using the debt snowball .
- Save 3–6 months of expenses in a fully funded emergency fund.
- Invest 15% of your household income in retirement.
- Save for your children’s college fund.
- Pay off your home early.
- Build wealth and give.
Listen: You don’t have to walk through this alone. Ramsey+ will help you reset, get out of debt (for good) and walk with you every step of the journey as you save, budget and rebuild your life—and even buy a home again.
And if you’re looking for someone to come alongside you, we can pair you with your own financial mentor. Our financial coaches will connect with you to understand your story and provide one-on-one coaching designed to help you win with money. Connect with a coach here.