What Goes Into the Home Foreclosure Process?
Foreclosure is a long process that allows a bank lender to recover money that was lost by a borrower not paying back their loan to the bank. The bank then recovers this money by taking re-possessing the house. Foreclosure begins when the borrower stops making their mortgage payments. It can only end in one of these ways:
1) The borrower pays their missed payments during pre-foreclosure (or, the grace period)
2) The borrower sells the property to a 3rd party
3) A 3rd party buys the property at an auction held by the bank
4) The lender repossesses the house and sells it on the market
Below are the steps of foreclosure:
Step 1: Missed Payments
Generally, the bank will make multiple attempts to work with the homeowner. If the homeowner does not cooperate, the bank contacts a lawyer. This attorney contacts the mortgager to try to resolve the default; if the homeowner cannot pay off the default, the attorney files a lawsuit with the court, in order to give notice to the public that a pending action has been filed against the homeowner. The purpose of the action is to provide evidence of a default and get the court’s approval to initiate foreclosure. See: Foreclosure Laws and Procedures By State.
Step 2: Pre-Foreclosure
Once a homeowner has missed 3 months worth of payments, the lender records a public notice that the owner has defaulted on their mortgage, and then mails the notice to the homeowner. This notice is known as a Notice of Default from their lender. The Notice of Default provides instructions to the homeowner as to the amount they need to pay, and a deadline. Read: Understanding Your Foreclosure Rights.
Step 3: Auction
If the loan is not paid by the end of the pre-foreclosure period, the property will be sold at a public auction. The lender typically sets a minimum bid at foreclosure auction equal to the amount owed on the property plus fees and various costs to the lender. Read more about: How the Process Works.
Step 4: Post-Foreclosure
If a third party has not purchased the property at the foreclosure auction, the lender takes ownership of it. Then, the property becomes bank-owned property. They are sold in two ways. Usually, they are listed on the open market by a realtor. Other lenders prefer to sell these properties in auction houses at convention centers.
Exits From The Foreclosure Process
Properties may exit the foreclosure process in several ways. Pre-foreclosures may exit the process prior to the Foreclosure Auction in one of several ways:
a) The borrower pays back their missed mortgage payments
b) The borrower receives a loan modification to reduce their mortgage payments
c) The borrower sells the property for less than what is owed on the loan (short sale)