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Even if you are facing foreclosure, you may be asking yourself how does foreclosure work? The thought of foreclosure frightens homeowners, and it’s unsettling to lenders as well. Knowing what happens at each stage of the process will help you set emotion aside and understand your options.

Preforeclosure
When a homeowner signs a mortgage agreement, he or she promises to make regular payments on the loan and agrees that if those payments fall behind (or are missed altogether) that the lender may take the home back through legal action. Preforeclosure occurs as soon as the borrower misses a loan payment and the lender files a notice of default. This first stage gives borrowers time, typically three months, to catch up on late payments, refinance the mortgage or sell the home before it heads to public auction.

Preforeclosure marks the beginning of the foreclosure process. In this stage, the lender orders a document called a Notice of Default, also referred to as a Lis Pendens in some states, that tells the general public that the foreclosure process has begun for a given property. In addition to giving the borrower time to catch up on late mortgage payments, it also lets the public know there is a preforeclosure property that may be available for purchase.

For lenders and homeowners, this is a critical time. Nobody wants the property to go into foreclosure. For the homeowner, it means a black mark on their credit rating or the possibility of filing for bankruptcy. For the lender, there is the chance of losing some or all of the value of the mortgage if the property is sold at auction.

Most lenders want to avoid a foreclosure. For homeowners, the best advice is to avoid preforeclosure by notifying your lender as soon as you realize that you might miss a payment. You may be able to negotiate a new payment plan with your lender. Some states also offer assistance for mortgage payments to low-income families.