Foreclosure: Definition, How it Works & Ways to Avoid it

Foreclosure refers to the legal process through which a lender takes possession of a property when the borrower fails to make timely mortgage payments or breaches the terms of the loan agreement. Foreclosure usually happens as a consequence of defaulting on a mortgage loan or when the borrower fails to meet other terms of the mortgage agreement as documented in the contract.

In 2022, it was reported that mortgage lenders repossessed 42,854 properties in the U.S., a 67% increase in comparison to 2021.

William Huston, AIF®, AIFA®

William Huston, AIF®, AIFA®

Key Takeaways
  • Foreclosure is a legal process through which a lender takes possession of a property when the borrower fails to make timely mortgage payments or breaches the terms of the loan agreement.
  • Depending on the state that you're in, the foreclosure process can be judicial or non-judicial
  • The foreclosure timelines vary depending on the state that you're in and can take anywhere between 3 month to several years
  • If you are experiencing foreclosure and would like to work with a qualified real estate agent to guide you through the process, get in touch with Ila here

The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here. More on disclaimers here.

How Does the Foreclosure Process Work?

foreclosure contract

The foreclosure process usually starts when a homeowner defaults or falls behind on monthly payment of their mortgage and receives a notice of default from the mortgage lender. The first step starts with the lender sending a missed payment notice when the borrower fails to make payment for that month.

If the borrower fails to make two payments, the lender then sends them a demand letter. At this point, many lenders are usually willing to make arrangements for the borrower to catch up on the pending payments.

If the homeowner fails to make payment after 90 days, they are then issued with a notice of default by the lender. At this point, the loan is handed over to the foreclosure department on the lender's side and the borrower is given up to 30 days to make the pending payments in order to reinstate the loan. If by the end of the 30 days the lender has not settled the missed monthly payments, the foreclosure process then begins.

Types of Foreclosure

sales pending

There are two main types of foreclosure; judicial and non-judicial.

Judicial Foreclosure

A judicial foreclosure is a legal process that involves court intervention when a homeowner defaults on their mortgage. In states that require judicial oversight for foreclosure proceedings, the lender initiates a lawsuit against the homeowner, filing a complaint in court.

The homeowner is served with a summons and has the opportunity to respond to the complaint. If the homeowner fails to respond or contests the foreclosure, a court hearing takes place where both parties present their arguments. The judge then makes a decision and issues a judgment of foreclosure if the lender's claim is validated. This judgment allows the lender to proceed with selling the property at a foreclosure auction.

Judicial foreclosures usually take longer as the process involves the court system.

Non-Judicial Foreclosure

A non-judicial foreclosure is a foreclosure process that does not require court intervention. It is typically used in states that have laws allowing lenders to foreclose on properties without going through the court system. In a non-judicial foreclosure, the lender follows a specific process outlined by state statutes or mortgage agreements.

The process begins with the lender issuing a notice of default to the homeowner, notifying them of their pending payments. This notice is typically recorded with the county or public records office and may also be sent to the homeowner by mail. The notice provides a specific timeframe for the homeowner to settle the pending payments and bring the mortgage payments up to date.

If the homeowner fails to settle the payments within the specified timeframe, the lender can proceed with issuing a notice of sale. This notice announces the date, time and location of the foreclosure sale, where the property will be auctioned off to the highest bidder.

On the scheduled auction date, the property is sold to the highest bidder, usually conducted by a trustee or foreclosure service provider. The winning bidder receives a trustee's deed or a sheriff's deed, depending on the state's regulations.

The non-judicial foreclosure process is generally faster and more streamlined than judicial foreclosure since it bypasses the court system. However, it's important to note that specific procedures and timelines can vary depending on state laws and mortgage agreements.

It's crucial for homeowners facing non-judicial foreclosure to understand their rights, consult legal resources and explore available options to avoid foreclosure or mitigate its impact.

What are the Foreclosure Timelines?

couple and their mortage broker

The foreclosure process in the United States can vary significantly depending on several factors, including state laws, the type of foreclosure process (judicial or non-judicial) and individual circumstances. The foreclosure timelines can range anywhere between 3 months and several years.

Can You Avoid Foreclosure?

When a borrower defaults on their mortgage payment, there are a few ways in which they can avoid foreclosure.


This process involves paying the total amount owed, including any late fees, penalties and legal costs to reinstate the loan and bring it back into good standing.

Short refinance

In a short refinance, the lender agrees to reduce the principal balance of the mortgage to an amount that is less than what is currently owed. This adjustment aims to make the loan more affordable for the homeowner and help them avoid foreclosure.

Special forbearance

Special forbearance is a temporary agreement between a homeowner and their mortgage lender that allows the homeowner to suspend or reduce their mortgage payments for a specific period. It is a potential option for homeowners facing financial hardship, such as job loss or a medical emergency, which makes it difficult to meet their mortgage obligations.

Tips on How to Avoid Foreclosure

realtor and clients
Communicate with your lender

As soon as you encounter financial challenges, it's crucial to reach out to your lender and explain your situation. They may be willing to work with you and explore alternative options to foreclosure.

Understand your mortgage terms

Familiarize yourself with the terms of your mortgage and any available options. Look for provisions related to loan modification, forbearance or repayment plans that could help you through temporary financial difficulties.

Explore loan modification or refinancing

Contact your lender to inquire about loan modification or refinancing options. These could involve adjusting the terms of your loan, such as reducing the interest rate, extending the repayment period or adding missed payments to the end of the loan.

Seek government assistance programs

Investigate government programs designed to assist homeowners in distress, such as the Home Affordable Modification Program (HAMP) or the Hardest Hit Fund (HHF). These programs provide various options to help struggling homeowners.

Consider a repayment plan or forbearance

If you expect your financial hardship to be temporary, you may be able to negotiate a repayment plan or forbearance agreement with your lender. These arrangements allow you to make reduced payments or temporarily pause payments until you regain your financial stability.

Consult a HUD-approved housing counselor

Housing counselors can provide free assistance and guidance on foreclosure prevention. They can help you understand your options, negotiate with your lender and create a realistic plan to avoid foreclosure.

Explore selling or renting the property

If you're unable to afford your mortgage payments in the long term, consider selling the property before foreclosure becomes inevitable. Alternatively, you could explore renting out the property to generate income to cover the mortgage payments.

Create a budget and reduce expenses

Assess your finances and create a realistic budget. Identify areas where you can cut expenses and increase income to improve your financial situation and make your mortgage payments more manageable.

Investigate bankruptcy as a last resort

While bankruptcy should be considered a last resort, it may provide temporary relief and allow you to reorganize your finances. Consult with a bankruptcy attorney to understand the potential implications and whether it's a viable option for your situation.

Consequences of Foreclosure

Foreclosure can have several effects and consequences for both the homeowner and the lender. Here are some common impacts of foreclosure:

  • The most apparent consequence of foreclosure is the loss of homeownership. The borrower must vacate the property, and the lender takes possession or sells it to recover the outstanding loan balance.
  • Foreclosure has a significant negative impact on a homeowner's credit score. A foreclosure remains on the credit report for seven years, making it difficult to obtain new credit, secure favorable loan terms or rent a home in the future. After seven years, the foreclosure is deleted from the borrower’s credit report.
  • The process can also result in financial loss for the homeowner. If the property is sold through foreclosure proceedings, it may be sold for less than the outstanding mortgage balance. In such cases, the borrower may still owe the lender the deficiency amount, which can lead to additional financial burdens.
  • Losing a home through foreclosure can be emotionally and psychologically challenging. It can lead to feelings of shame, stress and a sense of failure for the homeowner and their family.
  • After facing foreclosure, individuals can find it challenging to get access to alternative housing. With a foreclosure on their credit report, homeowners may face difficulties renting a new home or obtaining a new mortgage.
  • Foreclosure proceedings can involve legal expenses for both the homeowner and the lender. Homeowners may also face potential legal action from the lender to recover any deficiency balance or address any other related issues.
  • Foreclosure can impact the ability to obtain future credit and loans. Lenders may view individuals with a foreclosure on their record as higher-risk borrowers, leading to higher interest rates or difficulty obtaining financing.

Work With the Best

Ila Corcoran

If you’re facing foreclosure, it is important to work with a qualified real estate professional who can offer you guidance throughout the process. Ila is the best real estate professional who can help you maneuver the foreclosure process.

Ila Corcoran is the SVP of Real Estate Operations at Bay Street Capital Holdings. Her introduction to the real estate industry began after her family's experience with foreclosure. She started off her career in apartment management and leasing, then transitioned into the commercial real estate industry after which she moved to residential real estate where she found her passion.

For a year, Ila worked with 9 of the leading home builders in South California, facilitating the purchase and sale of newly constructed housing and starting a real estate portfolio of her own. As an active volunteer in her community, she used to see and experience the challenges within the real estate industry and the profound effects of housing insecurity for her community.

In 2021 alone, she led a team to close more than $80M in transaction volume across numerous states, with a laser focus on value-add services for the American homeowner. In 2022, Ila began a new journey with Bay Street Capital Holdings, and closed $10.4M in real estate and secured more than $2.2M in AUM during her first 6 months as a licensed investment advisor representative at the firm. During her free time, Ila enjoys serving apartment communities across Los Angeles and the non-profit housing space dedicated to serving those experiencing homelessness.

To work with Ila, get in touch with her here.

In Conclusion

Understanding the foreclosure process is crucial for homeowners facing financial difficulties. Foreclosure can be a distressing experience, but by being proactive and exploring available options, it is possible to avoid or mitigate its impact. Whether it's through open communication with your lender or exploring loan modification or government assistance programs, there are various strategies to help prevent foreclosure.

By staying informed, homeowners can navigate the foreclosure process with more confidence and work towards achieving a favorable outcome.

Bay Street Capital Holdings

Bay Street Capital Holdings

Located in Palo Alto, Bay Street Capital Holdings is a renowned wealth management firm that specializes in financial planning, wealth management and investment advisory services. What sets the firm apart is its unique approach of prioritizing effective risk and volatility management, rather than solely focusing on maximizing returns.

Founded by William Huston, who was recognized as one of Investopedia's Top 100 Financial Advisors for 2021, Bay Street stands out as one of the two Black-owned firms among the nineteen acknowledged in California. Their notable contribution in the real estate sector has led to Bay Street's recognition as a Finalist in the 2023 Industry Awards under the category of Asset Managers: Diversity, Equity and Inclusions for its work with Resthaven Properties

The company's commitment to diversity and support for emerging fund managers and entrepreneurs is evident through their selection as a finalist in the Corporate Social Responsibility (CSR) category for the Asset Manager in 2021. This recognition was achieved after competing against more than 900 firms nationwide, highlighting their dedication to making a positive social impact.



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