How Does Foreclosure Work?

Foreclosure can be a difficult process for homeowners. It occurs when a home owner can't make mortgage payments and the bank seizes the home, which was acting as the collateral or security on the loan. The bank then sells the home to try to recover their losses.

The foreclosure process generally begins when a home owner does not make his or her required mortgage payment. A mortgage is a secured loan, unlike credit card debt or a personal loan. The debt is secured by the house, which means that the house guarantees the loan and can be taken if the home owner doesn't pay.

As soon as a home owner misses a payment, the lender will generally send a letter to the home owner. The notice will request payment be made and will often include a late fee or other such charge.

If the individual pays at that point, the foreclosure process stops. If a payment isn't made, then lenders may continue with the foreclosure process. Usually, this involves phone calls attempting to collect the money.

If the homeowner still doesn't pay, at some point the bank or lender will generally send a demand letter demanding payment in full by a set date. If the home owner does not make payment in full, the home is in danger of being taken.

The exact process by which the home is taken varies depending on the state so you will need to explore the laws where you live to determine exactly what the foreclosure process is where you live. Generally, there are two major types of foreclosure:

• judicial foreclosure
• non-judicial foreclosure

Judicial Foreclosure

Judicial foreclosure occurs in states where the government requires the lender to go to court to get a judgment of foreclosure. The bank or lender will have to go to court to prove that the home owner has not paid and that the bank is entitled to the debt. This can include producing the mortgage note or other such related evidence.

In states with judicial foreclosure, the demand for payment letter may sometimes be issued by the court instead of the bank. Regardless of who sent the demand letter, however, the bank will have to show that they demanded payment and that the homeowner didn't pay.

Once the court is satisfied that the debt is owed and the bank has a right to collect, the court will issue a judgment of foreclosure against the homeowner. This is the legal judgment that allows the bank to take the house. At that point, ownership transfers to the bank and the bank can evict the home owner and try to sell the house - usually in a foreclosure auction.

Non-Judicial Foreclosure

Non-judicial foreclosues allow the bank to skip the step of going to court in some states. The mortgage documents include a "power of sale" clause giving the lender the automatic right to seize and sell the home when payments are not made.

In such cases, when the home owner doesn't pay up on time, the bank can automatically take the house. Usually, they send notice to the homeowner that they are doing so, while simultaneously listing the house for sale in a foreclosure auction in the newspaper.

Selling the House

When the bank takes the house -either in a judicial or non-judicial foreclosure- they generally try to sell it in order to recover the money owed. Most commonly, it is listed in a foreclosure auction and the starting bid is the amount owed to the bank on the loan, as well as any costs and fees.

If the home sells at auction, the bank takes the money owed first. If there is anything left over, it goes to the home owner. If the bank can't get enough for the house to pay off the loan and money owed in full, in some states the bank can then sue the home owner for the difference. When this is allowed, it is called a deficiency judgment and occurs in a separate court action after the foreclosure.