Understanding the Effects of a Foreclosure


If you’re potentially facing a foreclosure, you might have a lot of questions. For example, if someone looks up your name online, will they be able to see your foreclosure? How long does it stay on your credit report? Will you ever be able to buy a home again?

These are all common questions, and below, we detail more of what you should know about the process of foreclosing on a property.

What is a Foreclosure?

If you’re dealing with a difficult financial situation, you might find yourself unable to keep up with the monthly mortgage payments on your home. That puts you at risk of having to go through foreclosure.

When you go through foreclosure, the lender you got your mortgage from ultimately takes the property from you. Along with losing your home, it can have long-lasting effects on your credit history and scores.

Foreclosures are usually triggered by multiple missed payments, although every state has its own guidelines and laws.

Typically, the foreclosure process begins when you’re anywhere from three to six months behind on payments. If you don’t maintain the house or pay property taxes, it could also lead to a foreclosure.

Once you miss three months of mortgage payments, lenders record a public notice that you’ve defaulted on your mortgage, beginning the pre-foreclosure process.

The lender will mail a notice of default to a homeowner. Then, you have a three-month grace period where you can bring your mortgage current or work with the lender on an arrangement.

After the three months, a lender might publish for 21 days notice of trustee sale and then sell the home at an auction.

If you’re a borrower who’s in default, there are three types of foreclosure a lender can initiate.

These are:

  • Judicial foreclosure is required in some states but allowed in all. In this process, a lender files a suit with the judicial system. The borrower gets a notice that says they have 30 days to deliver a payment so they can avoid foreclosure. If the borrower doesn’t pay, the property is sold in an auction that the sheriff’s office or local court conducts.
  • During a power of sale foreclosure, also known as statutory foreclosure, the mortgage has a power of sale clause. The lender sends a notice demanding payment if the mortgage is in default. If the borrower doesn’t pay within a certain waiting period, the company goes forward with a public auction.
  • In a third type, during a strict foreclosure, which is only allowed in some states, the lender files a lawsuit against the owner of the home. If the owner isn’t able to pay in a period of time set by the lender, the mortgage holder takes the property over directly. This type of foreclosure is most common in situations where the debt amount is more than the property’s value.

Are Foreclosures Public Knowledge?

There are elements of a foreclosure that are public, although that doesn’t mean they’re necessarily easy to see if someone is just searching your name.

Usually, once a lender contacts you, and if you can’t make a payment within a certain period of time, a notice of default is issued. That’s filed on public record with the county wherever the property is located.

After filing a notice of default, the lender has to wait for the homeowner to remit the payment. Usually, this is a period of around 90 days. Then, the lender can hold a sale on the property after that. If you don’t pay back what’s owed in that period, the lender issues what’s known as a notice of sale.

The notice of sale document is filed on public record. The sale notice is also posted at the courthouse and on your home’s exterior. The notice is advertised in a local newspaper, and the sale is usually scheduled around three weeks after the filing of the notice.

When there’s a foreclosure sale, anyone can attend. The lender will usually make the starting bid whatever the unpaid loan balance is. The bidder who wins the auction gets a deed that grants ownership of the property.

The deed is filed on public record.

If someone goes through a judicial foreclosure involving a lawsuit, the whole case is public record, which is the case with other lawsuits of any kind.

How Does a Foreclosure Affect Your Credit Report?

A foreclosure will generally stay on your credit report for seven years, starting from the date of the first payment you miss. After then, the foreclosure should automatically go off your report, but even before that, you can work on rebuilding your credit.

Some of the impacts of foreclosure depend on what your credit was like beforehand. The higher your score, the more the impact of a foreclosure.

You can anticipate a foreclosure to cause your score to drop by 100 points or more, based on a report from FICO. It can take anywhere ranging from 7-10 years for your score to recover fully.

Also, while it should go off automatically after seven years, that’s not always what happens. If you find yourself in a situation like that, you can dispute the error.

To rebuild in the meantime, you should pay all of your bills on time. Your payment history is the main factor affecting your credit score. One of the best things you can do is to start building positive information on your report after a foreclosure.

You should also be mindful of your credit limit.

The second-biggest factor in your credit score is how much of your credit limits you’re using. That’s known as credit utilization. The lower your utilization, the better it is for your score. If you need to find ways to rebuild your credit because you can’t get traditional lines extended to you, you might think about a credit-builder loan or secured credit cards, which are specifically for this purpose.

What to Do Before You’re In Foreclosure

If you’re behind on your mortgage or even think you could be in the near future, be proactive.

  • First, reach out to your loan servicer right away. You can explain to them the situation leading you to be behind in your payments and ask about potentially available options.
  • Depending on why you’re having financial issues and your situation, you could be eligible for forbearance. Forbearance lets you skip one or two mortgage payments, and then you add them to your loan balance.
  • Your loan servicer might consider this if your problem was a single issue and your income and expenses are reliable enough that you’ll likely be able to catch up.
  • Another option could be refinancing your mortgage to get a lower interest rate if your credit is still in good shape.
  • There’s also the option to explore a loan modification. With a loan modification, you extend the length of your loan so that your payments align with your monthly budget.

If you receive a foreclosure notice, don’t immediately move out. The process can be a long one, and in some cases, if a homeowner vacates the property too early in that process, they find out months or potentially even years later the trustee sale hasn’t been completed.

During that time, you’re still responsible for the expenses associated with the home, and you’re liable if someone injures themselves on the property.

If the home is sold in a short sale or foreclosure, then you will be required to move out quickly, though. Usually, you’re required to move out within five business days after the sale is finished.

A deed-in-lieu of foreclosure is allowed in some states. This means that you agree to give your home to a lender to avoid foreclosure. You’re not required to pay your mortgage if you take this option, but you could be responsible for the difference between your mortgage balance and the home’s value.

The U.S. Department of Housing and Urban Development (HUD) has counselors who are certified to help people who could be facing foreclosure. If you work with a counselor, they’ll learn more about what you’re dealing with and the root causes of why you’re behind on your mortgage.

A counselor from HUD can look at your employment, your goals, and everything else related to your financial situation and do a full analysis.

There are a lot of long-lasting consequences of foreclosure, and many elements can also be public records, as well as the detrimental effects on your credit score.

You, of course, lose your home and have damaged credit. You also lose the equity in your property that you built up to that point, and in a judicial foreclosure, you might owe money on your remaining balance. You could be subject to wage garnishment, litigation, and more if you can’t pay.

The best thing you can do if you’re not yet in foreclosure but could be is to talk to your loan servicer before the problem grows any further and see what options are available to you. Open communication is key.


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