Under federal law, a loan servicer typically can’t officially start a foreclosure by making the “first notice or filing” required by state law until the borrower is more than 120 days delinquent. (12 C.F.R. § 1024.41). However, in some cases, the process can begin earlier.
When Is a Borrower Considered Delinquent?
A borrower is considered "delinquent" starting on the date that a payment sufficient to cover principal, interest, and escrow (if applicable) is due and unpaid.
What Is the First Notice or Filing in a Foreclosure?
State foreclosure laws and whether the foreclosure is judicial or nonjudicial determine which document is the first foreclosure notice or filing.
What Is the First Notice or Filing in a Judicial Foreclosure?
In a judicial foreclosure, the foreclosing party can’t start a suit in court by filing a complaint, petition, order to docket, or notice of hearing, until after the borrower is at least 120 days behind.
What Is the First Notice or Filing in a Nonjudicial Foreclosure?
In a nonjudicial foreclosure, the servicer can’t initiate a foreclosure by recording or publishing the first notice until after the 120th day of delinquency. If your state’s foreclosure laws don’t require any document to be recorded or published as part of the foreclosure process, the first notice is the earliest document that establishes, sets, or schedules a date for a foreclosure sale.
Applicability of the 120-Day Preforeclosure Period
The 120-day rule applies to mortgages that are secured by a property, which is the borrower's principal residence. (12 C.F.R. § 1024.30). But whether a property is deemed a borrower's principal residence depends on a number of factors. Sometimes, a vacant property can be considered a borrower’s principal residence, like if a military servicemember moves out due to a permanent change of station orders and was living at the property as a principal residence immediately prior to leaving, intends to return to the property at some point in the future, and doesn't own any other residential property.
Small servicers, which are exempt from some of the other requirements under federal mortgage servicing laws, must comply with the 120-day rule, assuming the property and loan meet the other criteria. The rule applies to both first lien and subordinate lien federally related mortgage loans, although it expressly doesn't apply to open-end lines of credit (home equity plans), or certain other types of exempt loans. (12 C.F.R. § 1024.31).
Purpose of the 120-Day Preforeclosure Period
The purpose of the 120-day preforeclosure period is to give borrowers time to apply for a foreclosure alternative, like a loan modification. Under federal law, if you send the servicer a complete loss mitigation application during the 120-day period, or if you’re more than 120 days past due, but the servicer hasn't made the first notice, a foreclosure can’t start unless and until:
- the servicer lets you know that you don’t qualify for a foreclosure alternative and your time to appeal that decision expires
- you turn down the option that the servicer offers you, or
- you agree to the option that the servicer provides, but you fail to live up to the terms of the deal, like you don’t make the required payments during a trial modification.
What Happens With a Rolling Delinquency?
When a borrower makes a payment, the servicer must advance the delinquency date (if the servicer normally applies the payment to the oldest outstanding periodic payment). So, if you miss a payment, you might remain delinquent for an extended time in a "rolling" delinquency.
How Does a Rolling Delinquency Work?
Here's how a rolling delinquency might happen: Suppose you skip one payment. The next month, you make a full payment, including principal, interest, and escrow. Over the next few months, you make regular, on-time monthly payments, but don't ever pay the missed payment to get current on the loan. Instead, you remain 30 days delinquent for an extended amount of time. In theory, the servicer can't start a foreclosure during this rolling delinquency because you haven't become more than 120 days delinquent.
How Servicers Can Deal With Rolling Delinquencies
But the Consumer Financial Protection Bureau (CFPB), which issued the 120-day rule, has noted that servicers may have alternative means for addressing situations in which a rolling delinquency might prevent the initiation of a foreclosure, such as acceleration of the loan (calling the loan due). (See paragraph 4 of the official interpretations of 12 C.F.R. § 1024.31). The official interpretation says, "This subpart does not prevent a creditor from exercising a right provided by a mortgage loan contract to accelerate payment for a breach of that contract. Failure to pay the amount due after the creditor accelerates the mortgage loan obligation in accordance with the mortgage loan contract would begin or continue delinquency."
So, the servicer might accelerate the loan in the above situation, requiring you to pay the total mortgage debt by a specific deadline. If you don't repay the full amount of the loan by the deadline, you'll be one day delinquent on the day after the due date. Once you're 120 days delinquent, the servicer could start a foreclosure.
Non-Monetary Breaches
The 120-day delay on starting a foreclosure also generally applies in the case of a non-monetary breach of the loan contract, such as not paying property taxes, causing damage to the property, or moving out of the home if the mortgage requires you to live there.
When Foreclosure Can Begin Earlier
The servicer doesn’t have to hold off on starting a foreclosure for 120 days if:
- The foreclosure is because you violated a due-on-sale clause contract. Loan contracts (mortgages and deeds of trust) often have a “due-on-sale” clause. This kind of provision says that if the borrower transfers the property to a new owner, then the lender can call the entire loan due (again, called “accelerating” the loan balance). Once a loan is accelerated, if you don’t pay off the entire balance, a foreclosure will start. However, federal law restricts the enforcement of a due-on-sale clause in some circumstances.
- The servicer is joining the foreclosure action of a superior or subordinate lienholder.
Order of Events When You Miss a Payment
While each situation is a little bit different depending on state law and the terms of your mortgage or deed of trust, here’s a general step-by-step description of what usually happens after you fall behind in your mortgage payments.
Late Charges Begin to Accrue
After your first skipped payment, the servicer can charge a late fee to your account, usually somewhere between 4% and 6% of the payment amount, but only after the grace period expires. Generally, the grace period is between 10 and 15 days.
Each month you don’t pay, you’ll rack up another late charge. To learn exactly how much the late fee is in your situation, check the promissory note that you signed when you took out the loan or look at your monthly mortgage statement.
You Might Incur Other Charges
After you become delinquent on your payments, most mortgages and deeds of trust allow the servicer to charge you for property inspections, broker's price opinions, foreclosure costs, and certain other kinds of fees, if applicable, like non-sufficient funds fees.
You’ll Get Loss Mitigation Information
Under federal law, the servicer has to contact you (or reasonably try to make contact with you) by phone or in-person no later than the 36th day of the delinquency to talk about loss mitigation options. Most servicers satisfy this requirement by calling. The law also requires the servicer to contact you again within 36 days after each missed payment, even if the servicer already spoke with you. But if you’ve filed for bankruptcy or have asked the servicer to cease communicating with you by invoking your rights under the Fair Debt Collection Practices Act (FDCPA), and the servicer has to comply with the FDCPA, then the servicer doesn’t need to call you.
Federal law also requires the servicer to send you a letter detailing potentially available ways to avoid foreclosure no later than the 45th day after you miss your first payment, and generally again no later than 45 days after each skipped payment, but not more than once during any 180-day period. Again, exceptions apply if you filed for bankruptcy or asked the servicer to stop communicating with you, but you might get a modified letter.
You’ll Get a Breach Letter
Most mortgages and deeds of trust require the lender to send a breach letter before accelerating the loan and beginning a foreclosure. Usually, the servicer sends the letter when you’re around 90 days overdue on the loan. The breach letter typically provides 30 days to cure the default, which you may do by reinstating the loan. Once that 30 days expires, you'll be 120 days delinquent, and a foreclosure can begin.
So, if you don’t reinstate the loan or work out another way to avoid foreclosure (like by agreeing to a repayment plan, getting a loan modification, or consenting to give up the property in a short sale or deed in lieu of foreclosure), the servicer will refer your file to a lawyer or trustee to initiate a foreclosure. But, as discussed above, if you’ve submitted a complete loss mitigation application to your servicer and it’s still under review, federal law (and sometimes state law) prevents a foreclosure from starting until the servicer makes a decision.
Talk to a Lawyer
If you're behind in your mortgage payments but believe that your loan servicer illegally started a foreclosure before the 120-day period expired, consider talking to a foreclosure lawyer. You might be able to force the servicer to start over, which could give you enough time to get caught up or work out an alternative.
To learn what kinds of foreclosure alternatives are available in your situation, call your servicer. If you need more information about different loss mitigation options, including modifications, short sales, and deeds in lieu of foreclosure, or need help with the application process, contact a HUD-approved housing counselor.
About the author:
Amy Loftsgordon is a legal editor at Nolo, focusing on foreclosure, debt management, and personal finance. She writes for Nolo.com and Lawyers.com and has been quoted by news outlets that include U.S. News & World Report and Bankrate. Amy received a B.A. from the University of Southern California and a law degree from the University of Denver.