Steps of Foreclosure: What Happens During a Foreclosure

Foreclosure is the result of the borrower defaulting on mortgage payments. It is a complicated legal process that can last many months. The net result is that the borrower or the home owner is evicted from the house on account of the inability to make payments. The lender generally recovers only a part of the dues on account of initiating foreclosure proceedings. If the mortgage deed has a power of sale clause, the foreclosure can be completed outside the judicial system. Otherwise, the lender may be forced to take the borrower to court. This results in a judicial foreclosure.

Power of Sale

Notice of Default: If a borrower skips paying the amount of money due on the mortgage loan, the lender sends a notice of default to the homeowner or the borrower. How soon is this notice served, after defaulting, depends on the lender. If the borrower is able to pay his dues, then all is well. If not, then it is best for the borrower to contact the lender and inform the latter about the inability to make payments. The lender may agree to allow short sales. Short sales will result in the lender recovering only a part of the money since the home is sold for less than the remaining mortgage payments. The lender may agree to a short sale in order to save time and money.

Deed of Trust: After the required waiting period, a deed of trust is drawn up transferring the legal title from the homeowner to the trustee. The trustee is entrusted with the task of selling the house, in case the homeowner does not come forth with the necessary payments.

Publication Period: The lender files an auction notice with the county recorder's office. The notice includes the name and the address of the trustee and the disclosure that the property is going to be auctioned.

Auction: After the stipulated waiting period, the home is auctioned off on the steps of the county court house. In case the sale is successful, the lender recovers the dues. If the lender is a bank and its attempt to auction the house does not meet with success, the bank takes possession of the house. The house is then known as REO or real estate owned by the bank.

Judicial Foreclosure

• The lender files a law suit with the court showing proof of default and seeking remedial measures.
• The borrower receives a copy of the complaint and a letter demanding payment.
• Generally, the borrower is expected to pay the amount within 30 days in order to avoid a foreclosure.
• The public is informed about the pending litigation.
• At the end of the specified waiting period, a judgment is passed and the property is now ready to be auctioned off.
• The property is then sold via auction, to the highest bidder by the sheriff's office.

A foreclosure should be avoided at all costs since it can result in a person's credit score falling by as much as 300 points. A judicial foreclosure is a costly process as compared to a non-judicial foreclosure. A judicial sale is allowed in all the states in the US. However, a power of sale is allowed only in 29 states. In some states, the home owner has the right to redemption. This would mean that the homeowner may be able to claim the property after a foreclosure by paying the dues.