Ever wondered about what the steps are in a typical foreclosure process? Here’s the quick rundown!

Step 1. Delinquency – Pre Notice of Default (NOD)

Normally, a borrower will need to be at least three months late on their mortgage payments for the foreclosure process to kickoff. After three months plus, a lender will issue the Notice of Default, which is the first formal action taken towards a homeowner not meeting their obligations. In most states and with most lenders, prior to the NOD being issued the homeowner will have an opportunity to contact the lender and try to work something out. Many lenders are recently becoming more apt to use “workable solutions” – for example, the lender may allow the borrower to miss 1 or 2 payments and add it to the end of their mortgage.  If the homeowner can take advantage of this, it can be an excellent temporary way to create some “breathing room”.

Unfortunately, people with true hardship (like disability or divorce) – a few months reprieve only delays the problem. If a workable solution can’t be negotiated or worked out, the lender will likely issue a NOD.

Step 2. Further Workout Attempts

NOTE: Know your state laws! Each state is different! For example, in California, Senate Bill No. 1137 requires that foreclosing lenders take steps to attempt to help homeowners who are in default on mortgages that were originated between January 1, 2003 and December 31, 2007- lenders must attempt to contact the borrower by phone “in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure” at least 30 days in advance of filing the NOD.

If a workout solution cannot be made, the lender may file for NOD. Again, depending on your state, the rules will differ. In some states, the lender must notify renters (if any). Certain languages may need to be accommodated. Some states (again, California as an example) will require longer notices sent to any tenants, such as 60 days instead of the typical 30.

Step 3. Notice of Default

The NOD Period is typically 90 days, and during this time borrowers normally are able to “catch up” on their delinquency remove the loan from the pending foreclosure status. The borrower may be responsible for any costs the lender occurs during this time period, but as with anything in the short sale business, these can often be negotiated if it’s a deal breaker. Remember, the goal is to help the homeowner ultimately – if there is a way to keep them in the house, that would be an ideal situation! Unfortunately, by this point in time there is rarely any going back.

Note that during this period, workout solutions and payment plans can still be created and implemented. The lender will be weighing their options at this point in time to identify best courses of action (foreclosure? Work out a plan? Contemplate short sale offers?) – this will vary depending on the particular circumstances of the given property.  Lenders are becoming increasingly creative during this time period as well, and may do things like add the payments to the end of the loan.

After the notice of default period expires (again, typically 90 days) the next step for the lender is that the notice of Trustee’s Sale can be recorded and published.

Step 4. Trustee’s Sale, AKA Lead Up to the Auction

The Trustee’s Sale is also known as the “Auction Date” and may occur as quickly as 21 days after the Trustee’s Sale notice is recorded (although it often takes longer).  When a short sale is in the cards, communication between all involved members is critically important, as any failure or delays can tank the short sale proceedings. It is important to note that the during this time the lender is using a “Trustee” to handle the foreclosure process, and at the same time negotiations and conversations regarding a pending short sale will be with the Loss Mitigation Department at the lender .

Again, this depends on the state, but often at this point in time the lender has the right to refuse reinstatement of the loan and can demand payment in full of the entire unpaid balance of the loan.  Most lenders will still allow reinstatement if the borrower is able to work out a solution (either via short sales or if the borrower is (unlikely) able to make a last-minute payment to catch up on the loan.

Step 5: The Auction

This is the end of the road, the last day where the borrower has an opportunity to settle up by paying the trustee the amount owed to the lender before the trustee calls an auction and bids are made.

After the Auction is over, there is little (if any) chance of recourse for the borrower. Your short sales should be completed before the auction!

Step 6: REO (Real Estate Owned) or other Ownership

Someone, or some entity, now owns the property via Trustee Deed.  The Trustee Deed is a powerful document, getting physical possession of the property requires additional legal action known as an unlawful detainer. This process typically takes 1 -2 months, depending upon the state. The lender maintains the house during this time period and will take protective action to prevent vandalism and further damage, including winterizing the house (in colder climates) and boarding up windows. If occupants still live in the property, eviction will also need to be performed.

Now What?

Now the new owner can do whatever they need to do to the property – sell it, fix it up, rent it out, whatever. If the owner is the bank, they will hold the property until they can sell it, carrying huge carrying costs and impacting their bottom lines significantly. The goal of a short sale is to stop all this before it ever gets to this step!

Running through it again!

•   Borrowers have hardship or cannot make their payments any more
•   The Borrower falls at least 3 months out of date on their mortgage
•   Lenders attempt to work out the default with the Borrower
•   If a workout can’t be completed, a notice of default (NOD) is filed
•   Short Sale process – a buyer or investor will make an offer on the property for less than the mortgage amount
•   The short sale package is included in the offer, and negotiations with the bank’s loss mit department begin
•   The lender will approves the short sale (because your short sale package was compelling!)
•   Homeowner can avoid foreclosure and the credit damage that goes along with it
•   Work to get a full release from the lender so the borrower is not financially responsible to repay the loss the lender takes.
•   Create the win / win solution for the lender and the buyer!