Understanding the Foreclosure Process

At the risk of stating the obvious, foreclosure is the legal process in which a lender sells or seizes a person's property to recover and repay the debt attached to that property. Foreclosure occurs when someone borrows money to buy real estate, but cannot pay the agreed-upon monthly payments.

A foreclosure can occur for a lot of reasons, things like a person losing their job, or someone getting struck with an illness, or an unexpected death in the family, even a change in the interest rates, any of these events can get in the way of people being able to continue making their mortgage payments. If a home owner can't keep up with the payments, the lender puts the property in foreclosure.

The first step towards foreclosure usually happens when the lending institution notifies the owners in writing that they are in default of payment. In most cases, the lender will bring in an attorney to start the foreclosure process after three consecutive payments are missed.

The attorney will send a letter informing the owners that if they do not pay what is owed, the lender will be forced to begin a foreclosure proceeding.The lender can also request a trustee sale or judicial foreclosure, where the property is sold at public auction.

The homeowners can still avoid foreclosure at this time by making the loan payments current and paying all overdue amounts after the notice of the default has been recorded.This is called the right of reinstatement.The last date for the money owed to be brought up to date and paid is called the cure date. It is usually no later than a few days before the property's impending sale.

If the homeowner cannot make these overdue payments, the foreclosed property is often sold at a real estate auction or trustee sale, where it is sold to the highest bidder.

If the property is worth less than the total amount owed to the lender (which can occur if property values have dipped since the homeowner acquired the original loan), the lender can seek a deficiency judgment, and the homeowner would not only lose their home, but could owe their lender or HUD an additional debt, which could be the difference between what the home sold for at auction and the balance of the loan.

Mortgage lenders usually consider a mortgage to be in default when payments haven't been made for a period of three months.

There Are Three Types

Of Foreclosures

While the reason for foreclosures may be similar from state-to-state and person-to-person, not all foreclosure processes are exactly the same. In fact, there are three different and distinct categories of foreclosures.

  1. Judicial Foreclosures which include:
  1. Mortgagor Defaults
  2. Complaint is filed and law suit initiated
  3. Notice of default is recorded
  4. Court Hearing and Date set for sale
  5. Sale date is advertised
  6. Foreclosure sale
  7. Buyer receives certificate of sale
  8. Period of statutory redemption
  9. Sheriffs deed conveyed to buyer
  10. Possible deficiency judgment

The judicial process is lengthier and depends on your state laws.

The legal procedure calls for an official letter from the mortgage lender to be sent to the borrower, indicating a default in payment, to be set right within a certain date (normally 5 days).

This letter of call is the first notice to the borrower warning him of the proposed foreclosure by the lender. If no action is taken from the borrower, the next step is the mortgage lender appoints an attorney and files a law suit to establish the default and obtain the order of the Court to foreclose the property. A legal notice is sent by the lender's attorney to the borrower indicating the commencement of the legal proceedings.

From the date of this legal notice, normally 90 days' time (or grace period) is allowed to the borrower to clear the outstanding balance of the mortgage loan and get back the rights of ownership of the property. This is the first stage of the Foreclosure process and is known as "Pre-foreclosure" period. The list of all such properties is published in the media for the information of the public and a copy of the foreclosure notice is also affixed visibly on the concerned property.

The Court passes an order for foreclosure of the said property and selling the property by public auction specifying the date and time of the auction at the court premises (normally months after). The auction takes place accordingly and the property is transferred to the highest bidder at the auction.

This stage is the actual foreclosure. If at the auction no buyer is interested to bid more than the cut off price (opening bid) then the lender repossesses the ownership. This stage is called "Post foreclosure". Usually these proceedings before a Court are long drawn for months together and only prevalent in certain States of the U.S.

  1. Non-Judicial Foreclosures which include:
  1. Trustor Defaults
  2. Trustee initiates Foreclosure
  3. Notice of trustee sale is recorded
  4. Sale date is advertised
  5. Foreclosure sale
  6. Trustee conveys deed to buyer
  7. Period of statutory redemption
  8. Possible deficiency judgment

The non judicial form of foreclosure is a rapid foreclosure process and is determined by your particular state law.

The process of foreclosure is similar here to the judicial form above, except that the mortgage lender is allowed to follow non-judicial procedures without the need to go to Court.

The Notice of Default is recorded at the County Recorder's Office and sent to the borrower with 5 days of reinstatement period. If no action is taken, a Notice of Sale, recorded at the Recorder's office is sent. This Notice of Sale is published in the media and a copy pasted on the property. Only 90 days time is allowed for clearance of the outstanding dues to the lender to avoid foreclosure. The sale of the property takes place on the date and time specified in the Notice of Sale at the county court.

The public auction is held and the bidders are required to pay deposit upfront to take part in bidding. The highest bidder has to pay the bid amount within 24 hours and take possession of the property. In view of the speed of foreclosure process with less procedural hassles, in most States of the U.S. only this system is preferred by the mortgage lenders.

  1. Strict Foreclosure
Involves a decree that orders the payment of a mortgage of real property. The strict foreclosure decree sets out the amount due under the mortgage, orders it to be paid within a particular time limit, and provides that if payment is not made, the mortgagor's right and equity of redemption are forever barred and foreclosed. If the mortgagor does not pay within the time designated, then title to the property vests in the mortgagee without any sale thereof.

Strict foreclosure was the original method of foreclosure, but today it is only available in a few states, such as Connecticut, New Hampshire and Vermont.

The foreclosure process is slightly different from state to state, and the two basic types of foreclosures are judicial and non-judicial. In mortgage states, judicial foreclosures are used. In deed of trust states, non-judicial foreclosures are used. Most states permit both type of proceedings, but as a general rule, commonly use only one method or the other.

Foreclosure is a legal proceeding enabled by the Foreclosure Laws of the Federal Government of the U.S. to protect the rights of the mortgage lender in getting back the outstanding loan amount in case of default of repayment.

At the same time, it provides that a fair opportunity to be given by the borrower to pay back the loan in time, even if the default has occurred continuously by non-payment of the monthly installments agreed upon.

To learn how to stop foreclosure, click here.

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