A Description of Foreclosure

From a homeowner's perspective, foreclosure is a time of financial distress. The emotional strain of falling behind on your payments and losing your home can be devastating. However, for a lender, foreclosure is simply a legal procedure. Per your mortgage agreement, the lender can take certain actions to protect its interests once your loan goes into default.

Past Due

Falling behind on your mortgage payments doesn't automatically lead to foreclosure. When your payment is less than 30 days late, there are few consequences. However, after 30 days, lenders may begin collection attempts and your late payment is reported to the three major credit bureaus.

Notice of Default

Between 45 and 60 days after your initial missed mortgage payment, you receive a notice of default from the lender. The lender describes the amount of your default and how you can bring the loan current. A due date for the past due balance is presented offering you a final opportunity to remedy your delinquent balance before foreclosure proceedings ensue. Failure to remit payment leads to foreclosure.

Pre-foreclosure

When lenders file for foreclosure, you are considered to be in pre-foreclosure until the process is complete. During this phase, the lender advertises the sale of your property through a public notice. An auction is arranged for your home so that the lender can recoup the remaining balance on your mortgage loan. You are still the legal owner of your home up until the date of the auction and sometimes afterward. Your ability to take back your home during or after foreclosure is called your right of redemption. Right of redemption in judicial-foreclosure states extends beyond the auction date.

Judicial vs. Nonjudicial Process

In judicial foreclosure states, the lender must ask the court for permission to foreclose on the home. In nonjudicial states, the foreclosure procedure is agreed when the mortgage loan is made, which means court approval isn't required.

Auction

In nonjudicial foreclosure states, auctions mark the end of ownership for homeowners. If the home is purchased at auction, the property becomes the possession of the highest bidder. However, when the property does not sell at auction, ownership is transferred to the lender. Lenders place the property on the market with a real estate broker in hopes that a buyer or investor agrees to purchase the home for the price listed. The list price is generally the remaining balance of the home loan rather than a reflection of current market prices.

Deficiency Judgments

The financial strain for homeowners doesn't end with the loss of the home. Lenders can pursue deficiency judgments after you lose your home. A deficiency judgment is the full amount of your outstanding mortgage debt (the difference between what the home sold for and what you owed), which may be due immediately following the auction. However, in some states, lenders can wait years to file a judgment to ensure you are in a financial position to repay the debt. Consulting with a HUD-certified foreclosure attorney regarding your mortgage rights can help you prepare for the extended consequences of foreclosure.

References

• Mortgage News Daily: Foreclosure Happens, But There Are Solutions; Glenn Setzer; 2005
• "The Complete Idiot's Guide to Buying Foreclosures"; Bobbi Dempsey; 2008
• "The Beginner's Guide to Investing in Real Estate"; Gary Eldred; 2008
• CNN Money: You Lost Your House - But You Still Have to Pay; Les Christie