What Is a Foreclosure?

A mortgage loan is one of the most secure and valuable contracts in the modern economy since the home is used as collateral to back the investment. Because the property is part of the transaction, there is always a risk of foreclosure.

At times, foreclosure is unavoidable due to unlucky economic circumstances, unexpected life events, high medical bills, and other reasons. Foreclosure can seem scary and vague. Today, let’s break down foreclosure in detail so that you know what to expect if your home goes into foreclosure—and how to avoid foreclosure through several smart strategies.

Foreclosures Explained

A foreclosure is a legal process available to mortgagees in all 50 states. During a foreclosure, a lender tries to recover funds or property on a defaulted loan by taking ownership of the contracted or mortgaged property and either retaining it or selling it. In real estate, foreclosures are used to take possession of a mortgaged home and transfer ownership back to the original lender/bank.

In a mortgage, as in other loans, the borrower defaults when they miss a payment. However, a borrower may also default on a loan if they do not meet other terms in the loan or mortgage contract (such as letting more than the agreed-upon number of individuals live in the property, damaging the property, etc.).

While the foreclosure process has similarities across states, states may also have varying rules or legal requirements that lenders and borrowers must go through to complete the process. Typically, foreclosure is considered a last resort by lenders. It is often costlier for them to complete a foreclosure than it is for the original borrower to resume making payments on time.

Because of this, many lenders will work with borrowers to help them avoid foreclosure if at all possible.

How Does a Foreclosure Work? 

A foreclosure is only possible because of standard clauses in mortgage contracts or other loans.

A mortgage or deed of trust contract gives the lender the right to use the property as collateral for the loan. Collateral in a loan is property or something of value that the lender may take possession of if the borrower defaults on their payments.

For a mortgage contract, the property of the mortgage is the collateral as well. In this way, a borrower who defaults on their mortgage loan may lose ownership of the property if the foreclosure process is completed.

The foreclosure process typically follows the below stages, although some steps may change depending on individual states’ requirements.

Payments Are Missed

Almost all foreclosures begin when the borrower for the property misses one or more payments. In most cases, a lender will only pursue foreclosure if the loan has been delinquent for three to six months. However, they will still alert a homeowner if one payment is missed.

A lender or bank will usually send out a notice to the homeowner alerting them to the missed payments in case there was a mistake (i.e., the payment(s) was lost, the homeowner forgot, or some other mistake occurred).

During this stage of the process, homeowners can use multiple resources to get their payments back on schedule, such as:

  • Using foreclosure mediation
  • Trying home loan modification programs
  • Trying government mortgage relief programs
  • Refinancing the mortgage
  • Starting a repayment plan
  • And more

Public Notices Are Given Out

However, if the borrower does not make future payments on time and does not pay back the missed payments, the lender may proceed with the foreclosure process. Again, most lenders will give the county and the homeowner public notice.

A public notice usually takes the form of a lis pendens or suit pending or a notice of default (NOD). These are written notifications to the homeowner that the lender is considering taking legal action because they are defaulting on their loan or not upholding their mortgage contract. 

Lawsuit May Be Filed

The lender may also file a lawsuit with the court or begin filing preliminary paperwork at this stage. In some states, the lender may follow the strict foreclosure process, which involves quickly taking direct possession of the property without going through the auction and sales process. This may shorten the time frame of the entire foreclosure process, giving borrowers fewer options to stop the foreclosure and retain possession of their home.

Foreclosure Begins

Once a lender records a public notice and the borrower does not balance their debts, the foreclosure process begins in earnest. At this point, the home will enter the earliest stages of repossession. Homeowners usually have around 90 days to take action to avoid eviction and a foreclosure sale. 

These potential actions include:

  • Selling the property in a short sale. It’s called a short sale because the sale price is usually lower than or “short” of the debt balance owed to the lender. But this may still allow the homeowner to pay off most of their debts and escape without too much financial damage.
  • Selling the property if it has enough equity to pay off the home loan fully.
  • Signing the deed to the lender instead of going through a foreclosure sale.
  • Paying the outstanding balance to reverse the default and halt the foreclosure process.

Auctioning and Selling

If the homeowner cannot pay off their debts, the lender often has no choice but to proceed with an auction and sale of the foreclosed home. The mortgage investor or a designated representative called a trustee will put the home up for auction, usually open to the public.

Before the auction takes place, the homeowner will be notified by a notice of trustee’s sale so that they know when the auction will take place. They will also be informed how much time they have left to vacate the home and its premises.

Every foreclosed home auction is distinct, although most have several key similarities:

  • A minimum bid is often set at the balance owed on the loan at the time of the foreclosure.
  • The foreclosed home is sold to the highest possible bidder.
  • The bidder must pay the full amount in cash or place a significant deposit at the time of the purchase (since the lender does not want to lose more money through the auction process).
  • The previous owner may exercise their right of redemption if they wish to repurchase their home after it is sold during a public auction.

Regardless, the goal of a foreclosure auction is always the same: to recoup the costs for the lender. 


After the foreclosure process has been completed, the previous homeowner is given a set date to move out of the home after the redemption period has passed. If they do not move out of the home on time, they may be forcibly evicted with the assistance of the county sheriff's office.

If the home is not sold at auction, the foreclosed property will become owned by the mortgage loan’s issuing bank. This will become real estate-owned property. The bank must then pay property taxes on the home and be responsible for the property until they sell it to another buyer or institution.

State Differences for Foreclosures

Although most foreclosure sales are essentially the same, different states may have different foreclosure processes or requirements.

For example, 22 states, including New York, Illinois, and Florida, rely on judicial foreclosure. With judicial foreclosure, lenders have to go through the courts and acquire permission to foreclose a property. They must prove that the borrower for the mortgage is delinquent on the loan.

Once a foreclosure is approved, the county's sheriff will auction the property to the highest bidder. Once more, either the bank becomes the owner, or the property is sold, and the bank or lender recoups costs.

In the remaining 28 states, such as Texas, California, and Arizona, the foreclosure process is usually nonjudicial. Also called the power of sale, nonjudicial foreclosure is a little faster than judicial foreclosure and does not require that the lender goes through the courts to prove delinquency.

However, it does allow the homeowner to sue the lender if the foreclosure process is illegal or they feel that they have not breached the terms of their mortgage contract.

How Long Do Foreclosures Take? 

That depends heavily on the foreclosed property’s details, the mortgage contract, and how aggressively the lender presses for a foreclosure sale. Because foreclosures can be expensive and time-consuming for lenders, many will attempt to help homeowners avoid defaulting on their loans and only pursue foreclosure when necessary.

The national average for foreclosure processes from start to finish is 857 days, but this timeline can vary significantly from state to state.

Why Do Some Homeowners Go Into Foreclosure? 

Foreclosure is always a stressful and financially risky process, which is why all homeowners attempt to avoid foreclosure at all costs. However, foreclosure is sometimes unavoidable, and it may not necessarily be because of bad financial habits.

Homeowners may go into foreclosure because:

  • Unforeseen economic circumstances, such as loss of employment
  • High medical bills from an injury or chronic health condition
  • Loss of income due to death of a family member or divorce
  • Taking on a high amount of debt
  • Natural disasters or accidents like a fire
  • And more

Remember that foreclosure is just a legal process. It’s not personal, nor is it a reflection on you or your abilities.

Consequences of Foreclosures

No matter the reason for foreclosure, homeowners should attempt to avoid it.

The consequences of foreclosure can include:

  • A significant reduction in your credit score
  • Difficulty acquiring future loans, especially from the same lending institution or bank
  • Loss of income
  • Loss of shelter/housing
  • Potential for bankruptcy

Ways To Avoid Foreclosures

Because foreclosure can be so financially and physically devastating, homeowners should always be aware of the potential strategies to avoid foreclosure for their properties.

Balance Home’s Co-Investment Process

Balance Home offers a unique co-investment process that may provide an affordable, flexible way to own your home and avoid foreclosure with no minimum credit score requirement.

Here’s how it works in a nutshell:

  • First, Balance Homes pays off your old mortgage and offers you, the homeowner, up to $50,000 in cash at closing to settle any other outstanding debt and improve your finances.
  • Balance becomes a co-investor alongside the home’s owner.
  • Each month, homeowners make an occupancy payment that includes a share of operating expenses.
  • On average, Balance co-owners save +$469/mo. Homeowners can also increase their ownership at any time by purchasing equity back from Balance.
  • To help you manage your finances, Balance provides co-owners with ongoing access to a portion of their home equity to avoid setbacks while their credit recovers. This means you can submit a request to access additional cash if necessary to avoid missing payments or taking on high interest debt. You can even buy Balance out in full at any point and refinance into a traditional mortgage or sell your home and keep your share of the proceeds.

This flexible and effective program could help you keep your home if you are under significant financial hardship and want to avoid the foreclosure process.


Homeowners may also pay back what they owe during the reinstatement period of foreclosure. Lenders will usually give homeowners a specific deadline, before which they can pay off the debt and any penalties, late fees, or interest without foreclosure proceedings and their credit score taking too much of a hit.

Special Forbearance

If you experience temporary financial hardship, such as a sharp increase in medical bills, a decrease in income from your lost job, and so on, your lender might agree to either reduce or suspend your mortgage payments for a certain amount of time for a special forbearance.

This may require you to pay back the lender with an interest rate or pay extra fees when possible, but it could help you retain ownership of your home until you get back on your financial feet.

Short Refinance

Lastly, you can also try a short refinance. You refinance your mortgage in a short refinance, but your new loan amount is less than the total outstanding balance. Therefore, the lender could forgive the difference in amounts to help you avoid foreclosure and ensure you keep making on-time payments.


As you can see, foreclosure can be a stressful and financially difficult process. But it's not unbeatable or unavoidable. Homeowners can avoid foreclosure and retain ownership of their homes by practicing the strategies above or contacting Balance Homes today.

With Balance Homes, you'll retain your homeownership and won't see a sudden drop in your credit score. Even better, you don't need to worry about refinancing your mortgage and paying extra costs in the process. Contact Balance Homes today for more information.


U.S. Foreclosure Activity Drops to 16-Year Low in 2020 | Attom Data

Foreclosure Definition | Investopedia

Chart: Judicial v. Nonjudicial Foreclosures | Nolo.com