Foreclosure: Meaning, Process & Alternatives to Avoid it

It’s not just a house. It’s a place you call home. Something you cherish a lot. And when you hear the word foreclosure get associated with it, it can definitely make you feel overwhelmed. To be honest, that’s pretty much normal.

But here’s the thing- you’re not alone. I just want you to know that you still have time. And more importantly, you still have options. What’s the tricky part? Most people don’t really understand what foreclosure actually means until they’re in the thick of it.

“Can I stop foreclosure once it starts?” or “What happens if I ignore it?” Chances are, you’ve already had those late-night searches typing in these questions. I can totally get that.

Just to put things in perspective: In March alone, 35,890 properties across the U.S. were hit with foreclosure filings, up 11% compared with February and up 9% year over year. Check out this article to know the numbers of foreclosures here.

One thing I have learnt after helping more than 68 homeowners through this exact situation and what I keep telling to my clients:

The earlier you take action, the better your outcome will be.

And that’s exactly what we are going to break down today in this blog. I’ll walk you through some stuff which you need to know about foreclosure- so that you can make informed decisions.

What Exactly Is Foreclosure?

Simply put, foreclosure happens when you fall behind on your mortgage payments and your lender steps in to take legal ownership of your home. It’s the lender’s way of reclaiming the property, which was used as collateral for your loan.

Missed payments can happen for many reasons- unexpected emergencies, job loss, medical bills, or other financial hardships. When these situations lead to continued non-payment, the lender may begin the foreclosure process.

Foreclosure is typically the final step after you've defaulted on your loan, and it often happens against the homeowner’s will.

How Soon Can Foreclosure Start?

By law, lenders usually can’t start foreclosure until you’re at least 120 days past due on your mortgage. This grace period is called the pre-foreclosure phase, and it’s your window to explore options, work with your lender, and try to avoid foreclosure.

Source: ATTOM

Your mortgage agreement states that if you stop making payments on your loan, the bank can reclaim the property through foreclosure. Depending on your state, the foreclosure process can be judicial or non-judicial. Some states have options for both.

Basically there are 2 types of foreclosure; judicial and non-judicial foreclosure. But what do they mean?

Difference between Judicial Foreclosure and Non- Judicial Foreclosure?

A judicial foreclosure is a legal process that requires the lender to file a lawsuit in court in order to foreclose on a property. This means the case goes through the court system, and the homeowner has a chance to respond or challenge the foreclosure in court. 

The judge must approve the foreclosure before the property can be sold. Because of this, judicial foreclosures tend to take longer and can be more expensive due to legal and court fees.
On the other hand, a non-judicial foreclosure happens outside of the court system. It’s usually allowed only if the mortgage agreement includes a “power of sale” clause, which gives the lender permission to foreclose without going to court. 

In this process, the lender follows a specific series of steps defined by state law- such as sending notices and holding a public auction. Non-judicial foreclosures are typically faster and less costly, but they also offer fewer protections for the homeowner.

Understanding the Foreclosure Process

• Borrower misses a mortgage payment. The homeowner fails to pay the monthly mortgage by the due date.
  
  
• The lender sends a notice of default. The lender formally notifies the borrower that they are behind on payments and at risk of foreclosure.
  
  
• Pre-foreclosure begins. A grace period where the borrower can resolve the default before the property is foreclosed.
  
  
• Foreclosure officially starts. The lender initiates legal (judicial) or administrative (non-judicial) action to reclaim and sell the property.
  
  
• Auction for the home. The property is publicly sold to the highest bidder, often at a courthouse or online.
  
  
• Property needs to be vacated. The former homeowner is legally required to vacate the property after the sale is finalized.
  
  How much does it cost?
  
  As far as cost is concerned, this is just to put the perspective out there- A homeowner’s average cost from a completed foreclosure was approximately $12,500 (in 2021 dollars, after adjusting for inflation), as noted in the Mortgage Servicing COVID-19 Final Rule. This may help you to get the idea around the same as this much it would approximate around.
  
  You might be asking yourself, “Is there even a way to stop foreclosure once it’s already in motion?”
  
  The good news? Yes- there absolutely is. Even if you've already missed a few payments, you still have time and options to protect your home.

Alternatives to Foreclosure

Foreclosure doesn’t happen overnight—it’s a process. And that means you have a window of opportunity to act. The most important thing? Don’t ignore the problem. The earlier you take action and communicate with your lender, the better your chances of avoiding foreclosure and finding a solution that works for you.

There are several alternatives to foreclosure, and each comes with its own pros, cons, and suitability depending on your situation. Here’s a breakdown of the most common strategies homeowners can use:

Reinstatement

If you've missed a few payments, your lender might allow you to “reinstate” your loan by paying everything you owe in one lump sum. This includes missed payments, late fees, and interest. If you can pay it all by a certain deadline, your loan goes back to normal as if you were never behind. This is one of the quickest ways to stop foreclosure- but you must act before the deadline.

Short Refinance

In a short refinance, your lender replaces your current loan with a new loan- but for a smaller amount. They may forgive the remaining balance that you can’t afford. It’s a rare option, but it can help homeowners stay in their homes when the property value has dropped or they owe more than the home is worth.

Forbearance

This is a temporary break. If you’re facing a short-term financial setback, like a serious illness, unexpected medical bills, or job loss, your lender may agree to temporarily reduce or pause your mortgage payments. Think of it like a grace period provided to you. After the forbearance period ends, you’ll need to resume regular payments and may also have to repay the paused amount gradually.

Loan Modification

A loan modification permanently changes the terms of your loan to make payments more manageable. The lender might lower your interest rate, extend the repayment period, or roll missed payments into the loan. You'll need to apply and prove that you’re experiencing financial hardship- but also that you can afford the new payments.

Partial Claim

A loan modification permanently changes the terms of your loan to make payments more manageable. The lender might lower your interest rate, extend the repayment period, or roll missed payments into the loan. You'll need to apply and prove that you’re experiencing financial hardship- but also that you can afford the new payments. If your mortgage has private mortgage insurance (PMI), the insurance company may step in to help.

They might lend you the money you need to catch up on missed payments. The insurance company does this because they also stand to lose money if you default. They may even assign a specialist to work with you through the process.

What If You Can’t Afford the Home Anymore?

In some cases, the financial situation isn’t temporary- it’s a permanent change. If it’s clear you can no longer afford to keep the home, there are still better alternatives to foreclosure:

Delay Foreclosure

If your financial hardship is long-term, your lender may be willing to pause or delay foreclosure for up to 120 days. This gives you a chance to sell the home yourself. If you sell the house for less than what you owe, the lender might forgive the remaining debt, depending on the situation.

Deed in Lieu of Foreclosure

This is a more graceful exit. You voluntarily transfer ownership of the home back to the lender, and in return, you're released from the mortgage. You won’t keep the home, but it’s typically less harmful to your credit and much less stressful than going through a full foreclosure. In some cases, you may even receive relocation assistance to help you move.

Short Sale

A short sale lets you sell the home for less than what you owe, with your lender’s permission. If the lender agrees, they may accept the sale amount as full payment and forgive the rest. This is often used when property values have dropped, and the home is “underwater.” It’s a complex process, but better for your credit than a foreclosure.

Bankruptcy

Filing for bankruptcy might help delay or stop foreclosure, depending on your situation.

• Chapter 7 may wipe out some debts, but it could still lead to the sale of your home.
• Chapter 13 allows you to keep your home and set up a repayment plan to catch up on your mortgage over several years.

Bankruptcy is complex and affects your credit long-term, so always speak with a lawyer before choosing this route.

Selling the House

If it’s clear you can’t keep the home, the best financial move may be to sell it yourself. Selling at market value can help pay off the loan, protect your credit, and allow you to start fresh. If possible, selling before the foreclosure process starts gives you the most control over the situation.

Sale Leaseback Agreement

In simple terms, a home sale-leaseback allows you to sell your home and lease it back- no moving, no disruption, just the stability of staying in the place you call home. The lease is set for a specific period, giving you time and space to figure out what’s next—without any added stress. In many cases, rent ends up being less than your mortgage, which means more breathing room and financial peace of mind.

At The District PHX, I’ve helped a lot of homeowners go through this process smoothly. My goal is to make sure you feel informed, supported, and confident every step of the way.

How Can We Help

Although every situation is different, a sale lease back agreement is worthwhile for homeowners seeking to avoid foreclosure. This approach addresses financial challenges while providing control over housing arrangements. 

The idea of foreclosure can be overwhelming, but homeowners should know that there are foreclosure alternatives that may make life easier. 

If you think this could be your situation, or you may also end up in this situation, just don't hesitate to reach out and explore these alternatives with The District PHX. We specialize in helping homeowners get access to their home equity for quick cash- exactly when they need it the most. 

Contact us today to discuss your situation and I’ll  help you find the best path forward.