Foreclosure is the legal procedure in which someone who has a mortgage lien or other lien on real estate such as a home takes possession of the property and sells it to pay a balance owed by the owner. For the sake of simplicity, this article assumes that the holder of the lien is a mortgage lender.

 

Historically, foreclosure involved the simple repossession of the property by the mortgagee, or lender. The law has changed over time to allow the mortgagor, or borrower, time to make their mortgage loan current before having their property reclaimed.

The foreclosure process begins with a notice of default or notice of delinquency from the mortgage lender. In some instances, the borrower may be able to work out an agreement at this point to avoid foreclosure. An example is forbearance, in which the lender agrees to let the borrower delay making payments.

Under many state laws, the lender will be required to issue a “notice of acceleration.” This serves to declare the entire loan amount due in full. The borrower must pay the entire loan balance to stop the foreclosure process. There is typically a 30-day deadline to repay the entire amount. After the deadline passes, the borrower may receive a summons advising them the lender is taking court action to proceed with foreclosure.

The next step is the notice of sale. A lender is required to send a notice of sale once it has established a time and date for the sale to occur. If the borrower has decided to sell the home, they must close with the buyer prior to this date. Once the sale is announced, most lenders no longer consider other alternatives to work with the borrower. A last effort that may be pursued by a borrower at this point is a deed in lieu of foreclosure. Although this is technically a foreclosure, it has a less damaging impact on the borrower’s credit.

If the property is to be sold at auction, the borrower may still be left owing the lender. Many foreclosed properties sell well below the property value with the result that the borrower owes the difference, as well as any auction fees and attorney fees that the lender incurred.