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How Do Foreclosures Work?
By Susan Willets | June 11, 2008
What is Foreclosure?
Foreclosure is the legal process in which a homeowner’s property is taken by a mortgage company, bank, or other creditor to satisfy a debt. It results from non-payment of the mortgage and/or property taxes. The homeowner loses the rights they had to the property.
Types of Foreclosures
There are three main types of foreclosure used in the United States:
- Judicial Foreclosure - The court supervises the sale of a property in default. The profits are used to pay off the mortgage that has been defaulted, then any other liens. If there are any funds remaining, they are given to the mortgager/borrower.
- Power of Sale - This type of sale is allowed in some states and allows for the lender to sell their home without the supervision of a court. While faster than Judicial Sale, the order in which profits are distributed remains the same with the mortgager receiving the first payoff.
- Strict Foreclosure - Strict Foreclosure used to be the most common type of foreclosure, but is now only available in a few states. With this type of foreclosure, a suit is brought by the mortgagee and if successful, a court orders the defaulted mortgager to pay the mortgage within a specified period of time. Should the mortgagor fail to do so, the mortgage holder gains the title to the property with no obligation to sell it.
Mortgage Foreclosure Process
Foreclosures take time, but most follow the same general steps outlined below. Properties can be searched for at each step. This information is also available in newspapers and court records.
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Notice of Default - When a mortgagee falls behind on payments, the bank sends a “Notice of Default.” At this point, the homeowner can still work with the lender, but must take action quickly to rectify the situation to avoid foreclosure.
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Notice of Trustee Sale - Three months after the Notice of Default, lenders can make an announcement they are putting the property up for auction. Time is limited, but the homeowner may still be able to fix the default and keep their home.
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Most homes receive no bids at the auction and are “sold” to the lender. These become bank-owned properties and are quickly sold to cover the amount owed on the mortgage.
Consequences of Foreclosure
The consequence of foreclosure can be severe and should be carefully avoided. In addition to losing your home, having a foreclosure on your credit report can make it difficult to get another mortgage in the future.
Be aware of tax consequences, as the borrower may owe taxes on the debt that was reconciled by the foreclosure.
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Topics: Foreclosures Overview |