What Is Foreclosure?

In exchange for a loan, the lender holds a lien (a legal claim or a "hold") against the property. If the borrower does not make the stipulated payments, then the loan goes into default. The lender can then exercise the lien against the property. This is to take legal possession of the property, and then sell it to clear the debt. This process is called foreclosure.

A property is put as collateral for a loan or mortgage. When the borrower fails to make payment under the loan agreement, the creditor is entitled to repossess the property. This is usually done through an agent. The lender then sells it to get back the money he loaned to the borrower.

Foreclosure starts as soon as the first payment is missed.

NOTE: Defaulting on a payment can cause a serious drop in the borrower's credit rating. Each sequential late payment continues to damage the rating, which in turn makes refinancing much more difficult. Lenders will often charge a penalty of around 5% for each payment deadline missed.

When a person falls behind on their mortgage payments and they have defaulted on their debt, the bank may foreclose.
It does this by filing a lawsuit in order to get a court order.



It's unlikely that this will be granted on the first hearing. Instead a suspended repossession order will likely be granted, which the borrower must abide by. This will include having an agreed a payment with the lender to reduce the arrears balance over a period of time.

If these payments are not met, the lender can apply for the repossession court order. The court is now likely to grant this. Once the court declares foreclosure, the lender will auction it off, with the highest bidder buying the property.

There is a waiting period between the date of the lawsuit and the foreclosure sale, which is often between three and twelve months depending on the local foreclosure law.

Depending on the jurisdiction, the lender may publish a foreclosure advertisement, according to the relevant foreclosure law, at least thirty days before the auction, once a week, for up to three weeks. Before the first advert is placed, the property owner may need to obtain a sheriff's 'notice of foreclosure sale'. As soon as the sale is over, the sheriff gives the title deed to the new owner.

The lender will attempt to sell the property quickly to recoup their money. They typically use auctions and estate agents. Sale price is  often discounted to attract a speedy sale. When the property is sold, the lender's account is cleared first.

Any surplus will be repaid to the homeowner. If, however, there is any shortfall, the lender can attempt to recover it from the individual involved for a period of up to twelve years!

If you are facing the spectre of foreclosure or repossession it's importantly that you find out all your options, then move quickly and decisively. Lenders are playing a numbers game: which is more profitable; getting you out and selling the place, or waiting to see what you can come up with? With each day that passes, interest, arrears and legal fees rise, raising the odds against you.