If a bank forecloses on your home, it means the lender is using its legal right to sell the property to recover what you owe on the mortgage. Under federal rules, that process cannot formally begin until you are more than 120 days behind on payments, and from there it moves on one of two tracks: a lawsuit in court, or an out-of-court trustee’s sale, depending on your state and your loan documents. The sale itself is only part of what happens. You may also face a bill for any shortfall, a tax form for forgiven debt, eviction if you stay past the sale, and a hit to your credit that lasts seven years.
The First 120 Days After You Fall Behind
A mortgage servicer cannot file the first legal document to start a foreclosure until you are more than 120 days delinquent. That rule comes from the Consumer Financial Protection Bureau’s mortgage servicing regulations and applies whether your state uses court foreclosures or trustee sales.1eCFR. 12 CFR 1024.41 — Loss Mitigation Procedures A few narrow exceptions exist (for example, if another lienholder has already filed), but they rarely touch a homeowner who simply fell behind.
During that window, your servicer is required to reach out. Federal rules call for a good-faith effort to establish live contact by the 36th day after a missed payment, with a written notice about loss mitigation options going out by day 45.2eCFR. 12 CFR 1024.39 — Early Intervention Requirements for Certain Borrowers These are not courtesy calls; they are legally mandated steps.
Separately, most mortgage contracts require the lender to send a breach letter (sometimes called a notice of intent to accelerate) before any foreclosure filing. It identifies the default, states exactly what you need to pay to bring the loan current, and gives you a deadline, typically 30 days. The specific terms depend on what you signed at closing.
How a Foreclosure Actually Proceeds
Which track your lender uses is set by state law and by whether your loan is secured by a mortgage or a deed of trust. The difference matters, because your defenses look different in each.
Judicial Foreclosure (In Court)
In a judicial foreclosure, the lender files a lawsuit. You will be served with a summons and complaint, and the case proceeds like any other civil action, with hearings, possible discovery, and a judge issuing a final judgment before any sale. This is the required path in mortgage states.
If you are served, respond. Missing the deadline (usually 20 to 30 days under state rules) lets the lender take a default judgment, meaning the court rules against you without hearing your side. Filing an answer preserves your ability to challenge the lender’s standing, contest the amount, or raise defenses based on how the loan was serviced.
Non-Judicial Foreclosure (Trustee’s Sale)
Where the loan is secured by a deed of trust, a third-party trustee holds a power of sale. The trustee can conduct the sale without going to court, as long as the lender follows the statutory notice and publication requirements exactly. Lenders generally prefer this route because it is faster and cheaper. Any procedural misstep, though, can be grounds to challenge the sale afterward.
Every state allows judicial foreclosure; many also authorize the non-judicial path. The loan documents and the state where the property sits determine which applies to you.
Options To Stop the Foreclosure
You are not without moves. If you submit a complete loss mitigation application more than 37 days before a scheduled sale, your servicer must evaluate you for every option it offers and send a written decision. Until that evaluation and any appeal are finished, the sale cannot go forward.1eCFR. 12 CFR 1024.41 — Loss Mitigation Procedures Federal law requires a fair evaluation; it does not require the servicer to approve any particular option.
The common outcomes:
- Loan modification, where the lender permanently changes the terms (lower rate, longer term, or both) to reduce the monthly payment.
- Forbearance, where payments are paused or reduced temporarily during a hardship, with a plan to catch up afterward.
- Short sale, where you sell the home for less than you owe and the lender accepts the proceeds as settlement.
- Deed in lieu of foreclosure, where you voluntarily transfer the home to the lender in exchange for release from the mortgage. Get the waiver of any remaining balance in writing.
Borrowers with FHA-insured loans have an additional option: a partial claim places the past-due amount into an interest-free subordinate lien that is not repaid until the mortgage is paid off, the home is sold, or title is transferred.3U.S. Department of Housing and Urban Development. FHA’s Loss Mitigation Program A trial payment plan may be required first, and the program allows only one permanent home-retention option in any 24-month period.
Bankruptcy
Filing a bankruptcy petition triggers an automatic stay that immediately halts nearly all collection activity, including a scheduled foreclosure sale.4Office of the Law Revision Counsel. 11 U.S. Code 362 – Automatic Stay For homeowners trying to keep the house, Chapter 13 is the relevant chapter: it lets you cure mortgage arrears over the life of a plan while making your regular monthly payments going forward. Federal law lets you cure a default through a Chapter 13 plan at any time before the home is actually sold at the foreclosure sale.5Office of the Law Revision Counsel. 11 USC 1322 – Contents of Plan You still need enough income to fund the plan and keep up with current payments, and if you have had a prior bankruptcy dismissed, the stay may be limited or may not apply.
Active-Duty Military Protections
If you took out the mortgage before entering active-duty service, the Servicemembers Civil Relief Act prevents a valid foreclosure sale during your service period and for one year afterward unless a court orders otherwise. That protection applies automatically.6Office of the Law Revision Counsel. 50 U.S. Code 3953 – Mortgages and Trust Deeds You can also request that the interest rate on a pre-service mortgage be capped at 6 percent (including fees) during active duty and for one year after.7Consumer Financial Protection Bureau. As a Servicemember, Am I Protected Against Foreclosure? If a court entered a foreclosure judgment while you were deployed and unable to appear, the SCRA gives you grounds to reopen that default.
What Happens at the Sale and Afterward
If nothing resolves the default, the process ends in a public auction. The property goes to the highest bidder. If no adequate bid comes in, the lender takes title and the property becomes REO (real estate owned), typically listed through an agent.
Right of Redemption
Some states give the former owner a window after the sale to buy the property back. This right of redemption usually requires paying the full sale price plus costs, and the period ranges from a few months to a year depending on the state. Not every state offers it, and the deadlines are strict.
Eviction and Cash-for-Keys
If you stay in the home after the sale and title transfer, the new owner has to use the formal eviction process. Changing the locks or removing your belongings is illegal. The new owner must get a court order, often called a writ of possession, which authorizes law enforcement to carry out the removal.
Many lenders and buyers would rather skip that. A cash-for-keys agreement pays you a set amount to leave voluntarily by an agreed date, with the home left in clean, undamaged condition. For you, it means moving money and no formal eviction on your record, which can otherwise make renting much harder. If you accept one, make sure the written agreement spells out the payment, the move-out date, the required condition, and a release confirming no further mortgage or rent is owed.
What You May Still Owe: Deficiency Judgments
If the sale brings in less than your loan balance, the gap is called a deficiency. In many states, the lender can go to court for a deficiency judgment and collect through wage garnishment, bank levies, or liens on other property you own.
Not every state allows this. Alaska, California, Oregon, and Washington prohibit deficiency judgments for most residential mortgages. Several others restrict them based on whether the foreclosure was judicial or non-judicial, the type of loan, or the size of the property. Where deficiency judgments are allowed, the amount is often capped at the difference between the debt and the property’s fair market value rather than the actual sale price, which can shrink what the lender recovers if the auction price was low.
If you negotiate a short sale or a deed in lieu, a written waiver of any deficiency is one of the most important terms. Without it, the lender may still pursue you for the shortfall after you’ve handed over the home.
The Tax Bill That Can Follow
When a lender cancels or forgives part of your mortgage debt, the IRS generally treats the forgiven amount as taxable income. The lender reports it to you and the IRS on Form 1099-C.8Internal Revenue Service. Home Foreclosure and Debt Cancellation
Several exceptions can take you out of that result. If your loan was non-recourse (the lender’s only remedy was taking the property), there is no cancellation-of-debt income. For recourse loans, you may still exclude the canceled amount if one of these applies:
- Insolvency: if your total debts exceeded the fair market value of your total assets immediately before the cancellation, you can exclude the canceled amount up to the extent of your insolvency.
- Bankruptcy: debt discharged in a Title 11 case is excluded from income entirely.
- Qualified principal residence indebtedness: for discharges that occurred before January 1, 2026, or under a written arrangement entered into before that date, up to $750,000 of canceled acquisition debt on a primary residence could be excluded. This exclusion has effectively expired for new foreclosure situations in 2026 unless a written agreement was already in place before the cutoff.
These exclusions are claimed on IRS Form 982 with your tax return. The insolvency calculation requires listing all assets (including retirement accounts) and all liabilities as of the moment just before the discharge, so keep thorough records.9Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
What It Does to Your Credit
A foreclosure stays on your credit report for seven years. Federal law bars credit reporting agencies from reporting it beyond that.10Office of the Law Revision Counsel. 15 USC 1681c – Requirements Relating to Information Contained in Consumer Reports The seven years run from the date of the first missed payment that led to the foreclosure, not the sale date. The hit to your credit score is heaviest in the first two years and gradually eases, but during that window it can affect your ability to get a new mortgage, rent an apartment, or clear certain employment background checks.
Free Help, and Scams To Avoid
HUD-approved housing counselors provide free foreclosure prevention help at every stage of delinquency. They can walk you through your options, help you deal with your servicer, and prepare a loss mitigation application. Call HUD at (800) 569-4287 or use HUD’s online counselor directory.11U.S. Department of Housing and Urban Development. Avoiding Foreclosure Reaching out before you hit the 120-day mark gives you the widest range of options.
Foreclosure also attracts scammers. The CFPB warns about operations that:
- Charge upfront fees before delivering any service. Legitimate mortgage assistance companies cannot collect fees until they produce a result you accept.
- Tell you to stop making mortgage payments.
- Ask you to send payments to anyone other than your lender or servicer.
- Pressure you to sign over title to your property.
- Push you to sign documents you have not had time to read.
- Guarantee they can stop the foreclosure no matter what.
- Claim to be running a “forensic audit” of your loan.
Real government officials never charge for foreclosure help.12Consumer Financial Protection Bureau. How To Spot and Avoid Foreclosure Relief Scams Anyone demanding payment by cashier’s check or wire transfer, or trying to isolate you from your lender, lawyer, or housing counselor, is almost certainly running a scam.