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The three types of foreclosure used in the U.S. are judicial foreclosure, power of sale (nonjudicial) foreclosure and strict foreclosure. Here's what you should know about each.
What Is Foreclosure?
A foreclosure occurs when a mortgage lender takes possession of a property from a borrower who fails to keep up with their loan payments. Virtually all mortgage loan contracts legally entitle the lender to seize the property if the borrower defaults, so the lender can recover as much of the unpaid loan amount as possible.
Three types of foreclosure are practiced in jurisdictions around the country, and the procedures that apply to your circumstances depend partly on state and local law and partly in the wording of your mortgage loan contract.
The Three Types of Foreclosure
With each of the three types of foreclosure, practices differ in terms of how the lender handles default, eviction and ultimately repossession of your property if you fail to repay your home loan. If you are facing foreclosure, it's wise to consult an attorney who can advise you on the procedures that apply in your locale, and your options.
Under a judicial foreclosure proceeding, the lender files suit with the court to initiate foreclosure—typically after the borrower misses their third consecutive mortgage payment (also known as going 90 days past due on their loan). The borrower receives a letter indicating foreclosure will commence if they don't bring the loan current within 30 days. (The time limit may be longer in some jurisdictions.) If payment is not made in time, the property is sold at an auction conducted by a court or sheriff's office. All states allow this type of foreclosure, and some mandate it.
Power of Sale (Nonjudicial) Foreclosure
Also known as statutory foreclosure, this procedure is authorized in states where the mortgage contract can include a power of sale clause.
This contract language allows a lender to conduct an auction to sell a foreclosed property without involvement from the judicial system, as long as they issue required notifications to the borrower and observe a mandatory waiting period that varies in length by state and locality. Power of sale foreclosures often take less time than judicial proceedings, but in some states the borrower can seek judicial review of the process by filing a suit of their own with the appropriate court.
The 29 states that allow power of sale foreclosures are Alabama, Alaska, Arizona, Arkansas, California, Colorado, Georgia, Hawaii, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia and Wyoming. They are also allowed in Washington, D.C.
Only two states, Connecticut and Vermont, allow for a special type of judicial foreclosure known as a strict foreclosure. Under this proceeding, the lender files suit against the borrower who is in default. If the borrower does not pay the mortgage within a time limit specified by the court, title to the property transfers to the lender directly, without requiring a sale. Strict foreclosures generally occur when the amount of outstanding debt exceeds the value of the property.
How to Avoid Foreclosure
Foreclosure can be a harrowing process, and one that has lasting consequences. The best way to survive foreclosure is to keep it from happening in the first place.
Here are some tips for steering clear of foreclosure:
- Reach out to your lender before you miss a payment. If you're about to miss a mortgage payment, reach out to your lender before it's due and explain your situation. They may offer options that can help. These include loan forbearance intended to help you get past temporary reductions in income, and modification of your loan by extending the length of your mortgage term but reducing the amount of your monthly payment. Lenders' willingness to make these concessions can depend on factors including your credit standing, the number of payments you've already made on your loan and whether you've previously missed or made late payments.
- Don't ignore communications from your lender. Very soon after you miss your first payment—and long before they can initiate foreclosure proceedings—your lender will attempt to get in touch with you. They'll typically call and send letters and may also email and text you if you've authorized them to send you electronic notices. Even though you may feel embarrassed or fearful, it's important that you don't ignore these messages. Most lenders will work with you to help avoid foreclosure, but they can't do that if you refuse to talk with them.
- Consult with the government's housing agency. The U.S. Department of Housing and Urban Development offers a variety of resources, including access to housing counselors who can help you work out a plan for avoiding foreclosure.
How Does Foreclosure Affect Credit?
Lenders report foreclosures to the national credit bureaus, and a foreclosure entry typically appears on your credit reports within a couple of months after a foreclosure order is finalized. The foreclosure entry, which is considered a serious negative event in your credit history, stays on your credit reports for seven years after the first missed payment that led to foreclosure.
A foreclosure has a negative effect on credit scores, with the number of points by which it reduces your score depending on how high your score was before the foreclosure and how many other negative entries (such as late or missed payments) you have on your credit report.
Foreclosure typically occurs only after you've missed at least three mortgage payments, so by the time a foreclosure appears on your credit report, those late payments may have lowered your scores so much that the foreclosure itself doesn't bring a major drop in credit score points. Like the foreclosure entry, the late payments leading up to the foreclosure will remain on your credit reports for seven years. The impact foreclosure has on your scores will likely diminish before the foreclosure entry and late payments are removed from your credit history, but it may still take several years for scores to rebound.
The Bottom Line
Foreclosure is a daunting prospect, and the anxiety it brings can work against your best interests. If you're facing foreclosure, it's wise to make the effort to understand the procedures that apply where you live, and to work with legal experts to pursue your best options. No matter what the outcome, you'll eventually get past it, but taking action can give you more, better choices than you'll have if you just wait for the process to run its course.