Resources - Foreclosure

Foreclosure is a legal process that is initiated by the holder of a mortgage or lien when the borrower is in default. The delinquent property is sold at public auction to recover the lender's investment.

When a borrower purchases a property and obtains a loan, he signs two documents. The borrower signs a promissory note that outlines the terms and conditions of the loan and borrower obligations. A mortgage contract is signed that establishes the property as collateral or security for the loan and a lien is placed on the property. The mortgage contract is a legal contract between the lending institution and the borrower that requires the borrower to keep the mortgage payments current.

The borrower is in default when he or she violates the payment obligations defined by the contractual agreement. The lender has the right to accelerate the delinquent loan. The acceleration process is governed by state law and requires the borrower to pay the full amount of principal remaining on the mortgage immediately. It is also known as "calling the loan." Lenders will sometimes work with the borrower to correct the delinquent payment problem. However, if the borrower is unable to make timely payments, the lender will begin a foreclosure process by accelerating the loan.

Banks may use several different methods to foreclose on properties. Non-judicial foreclosures are initiated by banks and lending institutions and do not require court approval. States that don't utilize a mortgage-lien system allow lenders to use this method. The property deed includes a power of sale clause that gives lenders the right to sell a property when a borrower is delinquent.

Banks and other lending institutions prefer non-judicial foreclosures because they are faster and less expensive. Borrowers have less time to correct their delinquency problem. The delinquent property is put up for sale and the lender is not required to go through a lengthy court procedure.

Judicial foreclosures are required in states that utilize a mortgage-lien procedure. The lender petitions the court to start foreclosure proceedings and the delinquent property is sold at public auction. The foreclosure process can be long and costly and the lender is not allowed to make a profit. The lenders are only allowed to recover their costs. If the auction bid is greater than what is owed to the lender, the difference goes to the borrower. If it is less, the lender may seek a deficiency judgment against the borrower requiring them to pay the remainder.

The borrower is generally afforded a reinstatement period during the foreclosure process. If the borrower pays the delinquency amount, court costs and any late fees within a redemption period defined by law, some states allow the borrower to reclaim the property even though it was sold at auction.

Strict foreclosure is sometimes used to acquire mortgaged property. A notice is given to the borrower and a deadline is established by the court for payment of the delinquent debt. If the debt is not paid by the required date, the court gives the lender title.

A deed in lieu of foreclosure is an agreement between the parties to convey fee simple ownership to the lender without going through the foreclosure process. Even though it is a friendly foreclosure, a damaging mark is put on the borrower’s credit history.

Bank foreclosures are sold at auctions. Lenders will sometimes bid in the auction if other bids are inadequate to cover the amount the lenders have invested in the property. If the lenders have the highest bid, they will take title to a property and will usually sell it at a later date in hopes of recovering their investment. Banks do not want to inventory real property so buyers can often get good deals by buying properties held by the bank.