What Is Foreclosure and How Does It Work?

Foreclosure is the legal process a mortgage lender uses to take or sell your home when you default on the loan, most often by missing payments. Federal servicing rules generally bar your servicer, the company that collects your payments, from making the first foreclosure notice or court filing until you are more than 120 days behind. After that, state law decides whether the foreclosure runs through a court (judicial foreclosure) or through notices and a trustee's auction without a lawsuit (nonjudicial foreclosure). HUD's state timelines for FHA loans allow 5 months (Missouri) to 30 months (Oregon, and Hawaii's court process) from that first legal step until the lender holds title and possession.

What gives a lender the right to foreclose?

Your loan has two documents. The note is your promise to repay. The security instrument, called a mortgage or a deed of trust depending on the state, pledges the home as collateral for that promise.

The standard Fannie Mae and Freddie Mac forms define default as failing to pay any amount when it is due, or breaking another promise in the security instrument, such as keeping the home insured or paying property taxes. The California deed of trust form includes a power of sale, which lets a neutral third party called a trustee sell the home without going to court. The Florida mortgage form has no power of sale and says the lender may foreclose "by judicial proceeding."

How does foreclosure move from a missed payment to a sale?

Each stage has its own deadline. The dates below count from the first payment you miss.

1. Late fee. If you have not paid by the end of the grace period in your note, the servicer adds the late charge the note sets. How many late payments you can make before foreclosure covers fees and credit reporting by loan type.
2. Day 36 and day 45. Under federal rules, the servicer must try to reach you by phone or in person by day 36, and must send a written notice by day 45 that describes options to avoid foreclosure and lists HUD's housing counselor phone number.
3. Breach letter. Before demanding the full balance, the lender sends a notice of default. On the standard forms it must name the default, say what will cure it, and give you at least 30 days to do so.
4. Day 121 or later. The servicer may make the first foreclosure notice or filing once you are more than 120 days delinquent. If you send a complete application for help, called a loss mitigation application, before that filing, the servicer cannot file until you are found ineligible for every option and any appeal is over, you turn down every offer, or you stop making the payments under an option you accepted. The servicer does not have to repeat this review for a new application if it already reviewed a complete one and you have stayed behind ever since.
5. Lawsuit or notice period, then sale or transfer of title. The state process can end in a public auction. In Connecticut's strict foreclosure, the lender can take title without a sale after court-set deadlines to pay the debt pass without payment. A complete application that reaches the servicer more than 37 days before a scheduled sale bars the sale on the same terms.

You can also stop the process by reinstating the loan. Check your own mortgage for the deadline; under the 2021 standard forms it is the later of 5 days before the sale or the deadline set by applicable law. Reinstating means paying everything that would be due if the loan had not been accelerated, plus the lender's foreclosure costs, such as reasonable attorneys' fees and inspection fees.

What is the difference between judicial and nonjudicial foreclosure?

In a judicial foreclosure, the lender files a lawsuit. You are served with court papers, you can raise defenses in court, and any sale happens only after the court orders it. The steps in a judicial foreclosure walks through the case from complaint to sale.

In a nonjudicial foreclosure, the trustee follows the notice steps in state law and the deed of trust, then sells the home at auction. In California, no judge reviews the case unless you file your own lawsuit, a right the California deed of trust form spells out. Colorado adds a court step: the lender must ask a district court for an order authorizing the sale, and the court decides at a limited hearing whether the lender has the right to foreclose and sell. You must file a response with the court and mail it to the lender at least 7 days before the hearing; otherwise, the court may cancel the hearing and authorize the sale. The first legal step differs by state: in California it is recording a notice of default, in Texas it is posting and filing a notice of sale, and in Georgia it is publishing the sale notice. The steps in a nonjudicial foreclosure covers those notices.

The table lists the method HUD names for FHA loans in each state and the months HUD allows FHA servicers from the first legal step to title and possession. HUD set these allowances in 2016 and they remain in the current handbook. They are limits for servicers, not promises; HUD grants extra time for delays such as bankruptcy filings and loss mitigation reviews. Where HUD lists two methods, both are shown.

Massachusetts is listed as nonjudicial, but the lender must first get a Land Court judgment confirming that you are not protected by the Servicemembers Civil Relief Act.

What happens at the foreclosure sale?

The home is sold at a public auction to the highest bidder, and the lender may bid. Under the California deed of trust form, the trustee pays the costs of the sale first, then the loan balance, and sends any money left over to the people legally entitled to it, which can include other lienholders and then you. A sale can be postponed by an announcement at the time and place it was scheduled. If no outside bidder beats the lender's bid, the lender takes the home, and it becomes bank-owned property.

What happens after the sale?

Three questions remain once the home is sold.

Can you buy it back? Some states give you a period after the sale to redeem, meaning buy the home back. Under Minn. Stat. section 580.23, a Minnesota owner generally has 6 months after the sale to redeem by paying the sale price plus interest and certain costs the buyer paid, such as property taxes and insurance, and 12 months in listed cases, such as when the debt claimed is less than two-thirds of the original loan.

Do you still owe money? If the sale brings less than you owed, the lender may ask a court for a deficiency judgment, a court order that you pay the difference, in states that allow one. Under Fla. Stat. section 702.06, a Florida court decides whether to grant one, and for an owner-occupied home it cannot exceed the judgment amount minus the home's fair market value on the sale date. Under A.R.S. section 33-814, an Arizona lender cannot collect a deficiency after a trustee's sale of a one- or two-family home on 2.5 acres or less that was used as a dwelling, and in other cases must sue within 90 days of the sale.

Forgiven debt can be taxable. The federal exclusion for canceled debt on a main home applies to debts canceled before January 1, 2026, or under a written arrangement made before that date. Otherwise, if you were personally liable for the loan, a balance forgiven in 2026 is generally taxable income, which the lender reports on Form 1099-C. You can exclude it if the debt was canceled in a bankruptcy case, or to the extent you were insolvent (owed more than everything you owned was worth) just before the cancellation, with any amount above that taxable. IRS Publication 4681 explains how to figure this.

When do you have to move? The buyer takes possession under state law. If you stay, the buyer must follow your state's eviction process; HUD requires FHA servicers to conduct evictions under state and local law. For an FHA loan, the servicer may offer up to $3,000 in "cash for keys" if you move out within 30 days of the offer and leave the home broom-clean with built-in appliances in place.

What should you do at each stage?

The earlier you apply, the more protections you get, but some help remains after a filing.

1. At the first missed payment, call your servicer, ask which options it offers, and ask for a loss mitigation application. Alternatives to foreclosure compares repayment plans, forbearance, loan modifications, short sales, and a deed in lieu.
2. Get help with the application. A HUD-approved housing counselor can help you apply and compare options. Your day 45 notice lists HUD's phone number for finding one.
3. Send a complete application early. Before the first filing, it holds off the filing. Received 90 or more days before a sale, it also gives you a right to appeal a loan modification denial. Received more than 37 days before a sale, even after a filing, it still holds off the sale.
4. Answer court papers by the deadline if you are served, including in a nonjudicial process such as Colorado's, and consider talking with an attorney. Ask a counselor whether your state offers foreclosure mediation.
5. Plan for the aftermath if you cannot keep the home. How foreclosure affects your credit covers the credit damage and how long you may wait for a new mortgage.