What is a foreclosure?
In simple terms, foreclosure is a process that a lender uses to try to recoup the balance of a loan from someone who’s stopped paying on it. They’ll try to make up that balance by selling the asset that a borrower has put up as collateral for that loan or mortgage.
In most cases, the borrower in question didn’t stop making mortgage payments willingly. It’s usually due to the person having lost their job or come up against unforeseen expenses. Some foreclosures are also the product of divorce or having to move to another location in a short amount of time. Only a small number of people willingly walk away from a mortgage, and they usually do so because the home is “under water”, which means the mortgage is worth more than the property’s value.
How long a foreclosure lasts depends on the type of foreclosure that’s being implemented. Many states require what’s called judicial foreclosure, which simply means that the sale is performed under court supervision. The lender in question, usually a bank, will file a lawsuit against the borrower for the remainder of the loan. This process can take anywhere from three to eight months depending on the state, and borrowers have the “right of redemption” all the way up until the final sale. This means that they can end foreclosure if they pay the balance of the loan.
Another type of foreclosure is known as nonjudicial foreclosure. In some states, lenders issue deeds of trust rather than actual mortgages. These allow the lender to sell the property without court supervision, and the process can be completed in as little as four months. The right of redemption still applies for most borrowers in this type.
A third type, mostly found in New England states, is known as strict foreclosure. This was the original method for foreclosing on properties, and it’s rarely used today. The lender files a suit, and if they win, then the borrower has to pay within a limited time period. If they can’t do so, then the lender takes the property without any selling requirements.
Regardless of the type, most foreclosures require the lender to file a notice of default. When this is given to the borrower, they enter what’s known as pre-foreclosure. This grace period, which lasts anywhere from 30-120 days depending on the state, allows the borrower to pay off the balance and any interest without going to court. If that isn’t done, the process continues.
A court will issue a judgement in favor of the lender, and the property will be sold at auction to the highest bidder for cash. This auction is also known as a sheriff’s sale because it’s presided over by the local sheriff or another court officer. If the property is sold, then the lender will take the money from that sale to pay the outstanding mortgage balance. If it isn’t sold there, then the lender takes possession of the property and, in most cases, sells it through a real estate agent. Some lenders, however, prefer to sell their properties at specialized liquidation auctions.