Definition: Foreclosure is a process in which the lender tries to recover the loan balance from the borrower, who has missed out the loan payment, by canceling the borrower’s right to redemption of property held as collateral with the mortgage holder and selling it to recover the amount due to him.
- Missed Payments: When the homeowner or borrower defaults the mortgage payment, for more than 90 days, then the lender can legally initiate the foreclosure process. If the borrower has missed less than three payments, then he is not under the pressure of foreclosure. This is the time period when the borrower must rework on his finances and reach to a lender to compromise in terms of payment, in case the funds are not arranged.
- Pre-Foreclosure: If the borrower does not make the mortgage payments for at least 90 days, then the lender issues a public notice that the homeowner has defaulted the mortgage payments and then mail the notice to the borrower, called a Notice of Default (NOD) or Lis Pendens. The NOD includes the property details, borrower’s name, delinquent amount, the number of days he is behind, etc. In pre-foreclosure stage, the borrower is given the grace period of three calendar months to pay all his dues to the lender or cure his defaults.
- Auction: Despite the notice of default, the borrower does not make the payment within the stipulated time period (three months), the lender or his representative, called a foreclosure trustee, will set the date on which the property will be sold at auction. This auction sale is called as a Trustee Sale.
The notice of trustee sale is recorded with the county’s office, delivered to the borrower, posted on the front door of the property being auctioned and published in the local newspapers so as to ensure that everybody knows about the auction, i.e. when and where it is going to be held.
In most of the states, the homeowner has the “right to redemption”, which means the homeowner can stop the foreclosure process by paying the outstanding amount anytime before or up to the moment the property is sold at auction. The highest bidder gets the property and he is required to pay the amount in cash.
- Post-Foreclosure: If the property is not sold at auction, then lender becomes the new owner of the property. Once it becomes the lender’s property, it is referred to as a Bank-Owned Property, in case the lender is a bank, or is known as REO (Real Estate Owned) by the lender.
Thus, these are the steps that need to be followed to complete the foreclosure initiated against the borrower who has defaulted on this mortgage.