What Is Foreclosure?
Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Typically, default is triggered when a borrower misses a specific number of monthly payments, but it can also happen when the borrower fails to meet other terms in the mortgage document.
Understanding Foreclosure
The foreclosure process derives its legal basis from a mortgage or deed of trust contract, which gives the lender the right to use a property as collateral in case the borrower fails to uphold the terms of the mortgage document.
Although the process varies by state, the foreclosure process generally begins when a borrower defaults or misses at least one mortgage payment. The lender then sends a missed payment notice that indicates they haven’t received that month’s payment.
If the borrower misses two payments, the lender sends a demand letter. While this is more serious than a missed payment notice, the lender may still be willing to make arrangements for the borrower to catch up on the missed payments.
What happens If my property fails to sell at a foreclosure auction?
If the property is not sold during the public auction, the lender will become the owner and attempt to sell the property through a broker or with the assistance of a real estate owned (REO) asset manager. These properties are often referred to as “bank owned,” and the lender may remove some of the liens and other expenses in an attempt to make the property more attractive.
For the borrower, a foreclosure appears on a credit report within a month or two—and stays there for seven years from the date of the first missed payment. After seven years, the foreclosure is deleted from the borrower’s credit report.
The borrower can often stay in the home until it has sold either through a public auction or later as an REO property. At this point, an eviction notice is sent demanding that any persons vacate the premises immediately.
The Foreclosure Process Varies by State
Each state has laws that govern the foreclosure process, including the notices a lender must post publicly, the homeowner’s options for bringing the loan current and avoiding foreclosure, and the timeline and process for selling the property.
A foreclosure—as in the actual act of a lender seizing a property—is typically the final step after a lengthy pre-foreclosure process. Before foreclosure, the lender may offer several alternatives to avoid foreclosure, many of which can mediate a foreclosure’s negative consequences for both the buyer and the seller.
In 22 states—including Florida, Illinois, and New York—judicial foreclosure is the norm. This is where the lender must go through the courts to get permission to foreclose by proving the borrower is delinquent. If the foreclosure is approved, the local sheriff auctions the property to the highest bidder to try to recoup what the bank is owed, or the bank becomes the owner and sells the property through the traditional route to recoup its losses.
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