What is a foreclosure?
Foreclosure is the process by which a mortgage lender takes back property after a borrower defaults on his or her mortgage payments. Once the bank forecloses on a property, the lender sells it to make back some of the money they’ve lost. While the process varies depending on where the property is located.
Why do people default on their mortgages?
Often, the borrower doesn’t have the money to continue making mortgage payments. This can happen for a variety of reasons, including recent unemployment, divorce or separation, or insurmountable debt. Interest rate increases can also be the culprit. If the borrower has an adjustable-rate mortgage and interest rates rise, the monthly mortgage payment goes up, too. What was once an affordable payment can turn into an overwhelming financial burden. When that happens, the borrower may have no choice but to default.
The phases of forclosure
Although the foreclosure process varies from one area to another, here are the common phases of a foreclosure procedure.
1. Payment default
When a borrower misses at least one mortgage payment, they’re in default. In general, the lender sends a missed payment notice that indicates they haven’t received that month’s payment. The lender may offer a grace period after which they’ll charge a late fee and send the missed payment notice. If the borrower misses two payments, the lender sends a demand letter. This is more serious than the missed payment notice. But the lender is probably still willing to work with the borrower to get them caught up on payments.
2. Notice of default
A notice of default (NOD) is sent after three to six months of missed payments. This public notice gives the borrower 30 days to remedy past due payments before formally starting the foreclosure process. Thus, many times a borrower can fall behind a month or two without facing foreclosure.
3. Notice of trustee’s sale
Depending on the area, the process for initiating foreclosure is different. In some areas, nonjudicial foreclosures can be done that only requires filing paperwork with the necessary court to start the process. With this, the foreclosure process can move rather quickly. However, other areas have judicial foreclosures, which require court approval for each step. Therefore, the process takes a bit longer.
Once the paperwork is filed with the court or necessary approval is met, the lender’s attorney or foreclosure trustee will schedule a sale of the property. A notice of trustee’s sale (also known as a notice of sale) is then recorded in the area where the property is located. This will state the specific time and location for the sale, as well as the minimum opening bid for the property.
4. Public auction
The lender (or its representative) calculates an opening bid for the foreclosed property. That price is based on the loan balance and any liens and unpaid taxes plus the cost of the sale. Then the property is sold to the highest bidder at a public foreclosure auction. After the sale is completed, the buyer receives a trustee’s deed (or other instrument) and becomes the official owner of the property. The borrower generally has three days to move out. If they don’t, the new owner can initiate the formal eviction process.
5. Real estate owned property
If the property doesn’t sell at auction, it becomes a real estate owned property (referred to as an REO or bank-owned property). When this happens, the lender becomes the owner. The lender will try to sell the property on its own, through a broker, or with the help of an REO asset manager. To make the property more attractive, the lender may remove some of the liens and other expenses.
