How does Foreclosure Work?

Foreclosures are the result of a payment default against a loan taken for the purchase of a property. Usually loans are forwarded on the condition that the loan amount and calculated interest is returned to the lien holder or lender, within a set time frame and in set monthly payments. If for some reason, the borrower defaults on the payment towards the loan, the lender repossesses the property by law.

The act of foreclosing is based on the equitable right of redemption that the lending party is legally assigned. The decision to foreclose a property for which a loan has been previously sanctioned is directed towards the repayment of overdue taxes, outstanding contractor bills and/or Home Owner's Association dues. The immovable property is repossessed with the intent of resale to cover up the debt incurred. A breach in the terms and conditions of the Deed of Trust and/or the lease agreement, leading to subsequent violation of mortgage rules leads to foreclosure.

Working of a Foreclosure

In a foreclosure, the mortgage lender forwards an appeal and then a warning to the default mortgagor. The amount of default repayment and the lapsed time frame are clearly indicated to the borrower. This is in line with the requirements of the subsequent litigation procedure. In the absence of a favorable response or any kind of communication from the borrower, the lender then registers for and announces a foreclosure on the property. There are different types of foreclosures, like Foreclosure by Judicial Sale, and Power of Sale, respectively.

In the case of the former, the court supervises every act within the mortgage, from sale of the mortgaged property, to legal actions in case of default and finally the foreclosure itself. In the case of the latter i.e., the Power of Sale, redemption clause is included within the Deed of Trust. In this case, the process can be carried out without court intervention. The other types of foreclosures that are also part of the real estate and homeowners tug-of-war include strict foreclosure applicable to certain states.

Foreclosure Questions

Q: What is the time period within which a foreclosure is announced, post default?
A: The period within which a foreclosure is announced depends on the amount owed and the length of tenure during which the mortgage has been broken.

Q: What is a 'Transfer Clause'?
A: A 'Transfer Clause' makes it mandatory for the mortgagor to inform the lender about any transfer of the property in question. This covers lease, land contracts and transfer of title.

Q: How long does a foreclosure take?
A: The length of this process varies from one state to another. Decisions with regards to short sale of the property, refinancing options available, temporary lender-arrangements and filing for bankruptcy take a while.

Q: What is 'Strict foreclosure'?
A: In this type of foreclosure, the right to sell the property mortgaged, to make good the owed amount is equitable. This right is offered to the purchaser of the foreclosed property. The primary lien holder has little or no say in the property evaluation after the foreclosure.

Q: Can a debtor challenge the debt validity?
A: Yes. A debtor can challenge debt validity. This is possible if the claim is against a bank, to address fiscal damages.