What is Foreclosure?
When a homeowner is unable to make payments on their mortgage, the lender gains the right to take control of the property, evict the homeowner, and sell the home. This legal process is known as foreclosure.
How Does Foreclosure Work?
Mortgages are loans that use real property as collateral against a borrowed sum of money. The amount generally correlates to the value of that property, and the borrower is allowed to live in the home so long as payments are made toward the principal loan amount, with interest. The deed to the property is held by the lender until the specified amount is paid in full. Once the final payment is made, the deed is then transferred to the borrower, who assumes full ownership of the property.
If those payments cannot be made, and the borrower defaults on the loan, the deed remains in possession of the lender, who can legally take back ownership of the home used as collateral, in order to cover their loss.
The Foreclosure Process
The foreclosure process becomes a possibility when a borrower fails to make a mortgage payment on time, rendering the loan as delinquent. If the borrower completely misses the payment (defaults), the foreclosure process can begin. When a homeowner defaults, they should be notified by their lender. Usually, borrowers are given a grace period to make up any missed payments and are typically charged fees on top of whatever money is owed.
If the mortgage remains delinquent after three to six months with no payments submitted, then the lender will officially begin foreclosure on the property. At this point, the more time that a borrower has spent in delinquency without making any payments, the harder it is to catch up with the payments, making it incredibly hard to stop the foreclosure process.
It is important to note that details of the pre-foreclosure and foreclosure process vary by state. In pre-foreclosure, a lender may present alternatives to foreclosure, including different attempts at mediation to negate any negative consequences towards both parties.
Aside from that, there are two main avenues of foreclosure: judicial foreclosure and power of sale (non-judicial foreclosure). Judicial foreclosure forces lenders to get the law involved for permission to foreclose on a property. If the lender can prove that the borrower has defaulted and remains delinquent on mortgage payments, then the local sheriff auctions off the property or ownership reverts to the bank who may then sell the property to cover their financial loss.
The non-judicial foreclosure process is much less strict and allows banks direct access to foreclose on the property without the involvement of the courts, unless the homeowner decides to sue the lender.
Foreclosure is not always beneficial for the lender. As a matter of fact, in rare cases before reaching the final stages of foreclosure, some lenders will opt to offer the borrower an adjusted payment schedule. This is known as mortgage modification.