Can You Sell a House in Foreclosure in California?

What is Foreclosure?

A foreclosure is when a lender, usually a bank, takes ownership of your home through a legal process and sells it to recover the amount owed. And although this is initiated when you fail to make your monthly mortgage payments, you don’t have to be afraid if you’re late by a week or two. Sure, you’d get hit by penalty fees, but there’s no way for your lender to legally force you out of your home in an instant. There are steps to follow, as we’re going to see in the following sections.

Foreclosure Process

Most foreclosures in California are non-judicial–meaning, lenders are not required to go to court to start the foreclosure process. And although a judicial foreclosure option still exists, most lenders don’t go for it since it takes longer and is much more expensive, as a judge’s approval is required. Nevertheless, the lender can only go the nonjudicial route if it is spelled out in the mortgage contract. 

Key Differences Between Judicial And Nonjudicial Foreclosures in California

Judicial Foreclosure

• Can take months, and in rare cases, years
• More expensive because of court costs and filing fees
• If you still owe money even after your home has been auctioned off, the lender can go after the remaining balance upon securing a deficiency judgment
• You have the right of redemption, which means you can buy back your home after it’s sold, within a certain timeframe: 3 months if the sale paid off all that you owe and 1 year if you still have a balance remaining. 

Nonjudicial Foreclosure

• Takes less time, generally between 4 and 6 months
• Costs less since there’s no court involvement
• If you still owe money even after the foreclosure sale, the lender can’t go after you for the rest of the mortgage balance. Essentially, the lender is trading speedy resolution for the certainty of being made whole
• You cannot buy back your home after it’s sold

Foreclosure Timeline

The foreclosure timeline in California can vary on a case-by-case basis. But generally, you can expect it to be within 200 days, if everything goes according to schedule: 

90 days late: Notice of Default

If you haven’t made any mortgage payments within the last 3 months (90 days), your lender can start the foreclosure process by mailing you the Notice of Default. From the receipt of the Notice, you’ll have 90 days to “cure” the default by making up your back payments. However, if you’re not able to, reach out to your lender for alternative options such as repayment plans, loan modifications, or renegotiate your loan terms.  

180 days: Notice of Trustee Sale

If you don’t catch up on your missed payments or take no action at all within 90 days after receiving the Notice of Default, your lender will mail you a Notice of Trustee Sale. The auction date will be indicated in this Notice, which is typically 20 days after its issuance.

It’s still not too late to take action! You can still stop foreclosure by filing bankruptcy or entering into last-minute negotiations. However, manage your expectations, as waiting this long has severely narrowed down the legal resources available to you.

200 days: Foreclosure Sale through Auction

If you didn’t file for bankruptcy and/or negotiations failed, the property will be sold at a public foreclosure auction–also called a trustee’s sale. This usually happens at the county courthouse. Once it is sold to the highest bidder and you’re no longer the legal owner, eviction proceedings will be started, and you will be ordered to vacate the property.   

Is There a Way to Stop Foreclosure?

Foreclosure, or the actual repossession of your property by your mortgage provider, is the final step in a lengthy process. And because it takes a while to complete, there are plenty of ways for you to stop it–provided you take action.

Before starting the whole foreclosure process, your mortgage lender will reach out to you if you start missing payments. Oftentimes, they will be willing to make arrangements with you so that you can get current on your mortgage. But there are cases that they won’t be as amenable. Even still, there are ways for you to stop the process, including selling your home pre-foreclosure, as California law doesn’t prohibit homeowners from doing so. 

Get current on your monthly mortgage payments

In life, lots of things can happen that can lead to you missing your monthly obligations. Perhaps there was an emergency expense that wrecked your budget. Or maybe you just forgot the due date.

Don’t worry! You’re not going to lose your home just yet. Simply catch up on any missed payment, pay the applicable late fee (or ask for it to be waived), and voila, you’re safe from the dreaded F-word. 

Refinance your loan

By refinancing your mortgage, you can halt the foreclosure process by paying off your existing loan and replacing it with a new one. Do note that if you refinance, that sweet interest rate that you secured before could change to reflect current market conditions. On the upside, you can lengthen your loan term to reduce your monthly amortization and make it more manageable.

Reach out to your lender for a loan modification

If your setback isn’t temporary and you’ll be having difficulty paying your financial obligations for the foreseeable future, you can request that your bank adjust the terms of your loan through loan modification. There’s a criterion you have to meet, such as divorce, medical emergency, job loss, or loss of a business. With a good credit score, you’ll also be able to get a favorable loan modification.

Here are some options that you could go for:

• Conversion of variable-rate mortgage to fixed-rate: lots of homeowners were attracted to lower initial interest rates for variable-rate loans. However, it could spiral out of control throughout the life of the loan, leading to higher and higher interest rates compared to fixed-rate loans. You can request the switch so you can manage the payments better.
• Reduction of principal: You can request your lender to reduce the principal instead of foreclosing on the property
• Loan term extension: extending the loan term can reduce your monthly payments by spreading them out further. And although you’ll end up paying more money in the long run, having less to pay for now in order to keep your home is much more beneficial. You can always renegotiate once you’re in a better financial position.
• Postponement: It’s possible to ask to pay at a later date, especially if you’re just going through a rough patch.

Sell your home pre-foreclosure

If foreclosure is inevitable after you’ve exhausted all the means we have discussed above, you can get ahead of it by selling your home pre-foreclosure. By acting quickly, you’ll have control over the entire process, and you won’t be pressured into accepting a short sale. This provides you with a fast and graceful exit from financial distress without tanking your credit. Do note that you must verify your loan agreement so that you avoid getting into any legal hot water.

Sell your property via a short sale

If all of the above options aren’t workable for you, especially if your loan is severely underwater, then you can consider selling via a short sale.

From the name, a short sale means you are selling a home “short”, or for less than what it’s worth. It’s natural to wonder why your bank would agree to this, since essentially, they won’t be getting paid. 

Well, as shown above, foreclosure is a tedious process, and it’s not free, so lenders might be open to a short sale instead of going through that. And although you walk away with zero money after you sell short, you also walk away with zero debt.

However, you must know that the IRS can treat the forgiven debt as income. For example, if you owe $300,000 on your home, and the house was sold short for $250,000, you’d be liable for taxes on the $50,000 that was forgiven. But don’t worry, you can still secure an exclusion provided you meet certain requirements.

Deed-in-lieu of foreclosure

This is also called a “friendly foreclosure”, wherein you willingly transfer ownership of your home back to your mortgage company to avoid foreclosure. For homeowners with little to no equity, this is recommended since much wouldn’t be lost in any case. But if you’ve built up a sizable equity through the years and you’re considering this option, you can also negotiate for relocation assistance and other expenses through “cash for keys”, so you won’t be starting from scratch.

Declare bankruptcy

This is undoubtedly the nuclear option, but it does the job of stopping foreclosure in its tracks–yes, even if the auction is a mere few days away. This is because when you file for bankruptcy, an automatic stay is immediately granted, keeping all your assets safe from creditors until the bankruptcy process is resolved. How the process exactly plays out depends on the type of bankruptcy that you file.

For example, if you file for a Chapter 13 bankruptcy, you can save your home and work out a repayment plan that will service your debts within 3-5 years. On the other hand, if you file for Chapter 7, all non-exempt property, including your house, can be liquidated to pay off creditors.

If you take this route, it’s useful to meet with a lawyer so you can decide if this option is going to work best for your situation.

Short Sale vs. Foreclosure: Which is Better?

While both have a negative impact on your credit score, one is easier to cure. In general, your credit score will recover faster if you choose to do a short sale than get foreclosed on. 

A foreclosure stays in your credit report for 7 years. During this time, banks and lenders will be wary of giving you a loan because they will be doubtful of your ability to pay. This means it will be tough to secure a loan for a new house, or even a new car, and it would take around 3 years of on-time payments before your credit score is back to healthy levels.

That’s a long and difficult way towards recovery, which is why a short sale is preferable. Yes, it will stay on your credit report for 7 years, but it also allows you to rebound within 2 years. Timely payments, low credit utilization, and paying down debts can all help in rebuilding your credit rating. 

To sum up, you need time for both a short sale and a foreclosure to be completely expunged from your credit history. 

But a key difference, apart from the recovery time, is that you will be working alongside your lender in a short sale. This is because you’d need your lender’s permission to be able to sell the property “short”, wherein they will have to accept money for less than what it’s worth. Still, you can negotiate for terms that will benefit you both. On the other hand, with a foreclosure, there’s no such option. Once the lender secures a deficiency judgment against you, recovery will be harder.

Options in Selling a Home Under Foreclosure in California

Selling your home under foreclosure is possible in California. In fact, there are three avenues open to you: the conventional route with a realtor; the challenging option of managing the sale yourself through FSBO; or the fast and easy way of selling to real estate investor home buyers in Los Angeles and cash buyers.

Selling with a Real Estate Agent

You can sell with a real estate agent if you’d like to reach the widest pool of buyers. As a matter of fact, there are agents who specialize in selling and marketing pre-foreclosure homes. They’re also in charge of the whole process from start to finish, so you wouldn’t have to worry about anything.

The tradeoff is that they will collect commissions, typically between 3-6%, shaving off a chunk of what you could have made from the sale. Additionally, it takes over 90 days to sell if you list with an agent. And as you’re dealing with a tight timeline once the foreclosure process has been started against you, this might not be workable for your situation.

For Sale By Owner (FSBO)

To avoid the hassle and costs of working with realtors, you can take over the process yourself through For Sale by Owner (pronounced “fizz bow”). Do note that having full control means having full responsibility as well, so you’ll be doing ALL the legwork. You’ll have to stage your home, market it online and offline, conduct showings, and finally, do all the negotiating. Since sales are largely dependent on how skillful you are in marketing and salesmanship, consider the possibility that your house may languish in the market for a while.

It’s daunting, so if you feel like you might not be cut out for it, then you can always consider…

Selling to a Cash Buyer

Since you’re under a lot of financial and time pressure once foreclosure has begun, you’ll definitely want a quick sale. And with that, your best bet is to sell your home to California cash buyers.

Cash home buying companies and real estate investors specialize in problem properties, like those under foreclosure. Since they pay in cash, there’s no waiting around for loan approvals on their end, and they can close in a matter of days or a couple of weeks at most. You also don’t have to make the effort of sprucing up your home, as they will take it as-is.

And while you might sell for less than the market value, the time saved and the certainty make it worth it. With a cash sale, you’ll get the peace of mind and freedom from financial distress.

Closing Thoughts: Selling Property in Foreclosure in California

There’s nothing to fear if your mortgage company has started foreclosing on your property. There are still plenty of options at your disposal, from loan modification, refinancing, short sales, and so much more. Getting a Notice of Default is not the end of the world. You can always sell your property, avoiding the threat of foreclosure entirely.

Here at Eazy House Sale, we’re passionate about helping owners find solutions in complex property situations–including foreclosures. Based in Los Angeles, we’re familiar with the local real estate market, so you’re sure that our cash offers are fair and honest.

If you’d like to get our quick, no-strings-attached cash offer for your California home, just fill in our form below.

For any questions, feel free to reach out to us!