What Happens During a Foreclosure?

Foreclosure is the process in which the bank seizes your home if you can't pay your mortgage bills, and then sells your home. The specific foreclosure laws vary on a state by state basis, but many of the components of the process are the same.

Although what happens during a foreclosure varies state by state, there are some commonalities that occur in the foreclosure timeline. Generally:

1. You fall behind or are late in sending a monthly mortgage payment
2. The lender sends you a notice, specifying the amount of the missed payment and the amount due to become current again, including any late fees assessed. You may also receive a phone call (or several) from your lender. You may want to try to speak with your lender at this time and resolve things, as most lenders want to avoid foreclosure and may be willing to work with you to help
3. Your lender files the appropriate notice, depending on the state. Most often, this is a Notice of Default that is filed with the County Clerk or County Recorder. Some lenders will do this after a single missed payment, but most won't. Typically, a lender will wait until you are three months behind (or more) to take this step
4. You will receive a notice (usually called a notice of default or a letter of complaint) from the court in the mail. This letter will demand payment of the entire amount owed to bring the mortgage current, including fees. Normally, you are given thirty days to pay
5. If you do not pay, the lender will put a public notice of foreclosure in the paper. In some states, ownership of the home may transfer to a trustee at this time and/or you may receive a notice of foreclosure
6. The home will be sold in a foreclosure auction or short sale. The starting bid is usually the amount due on the loan. So, for example, if you owe $100,000 on the loan, the starting bid to buy the house would be $100,000. If the home sells for more than the amount you owe the bank (including fees) the bank will pay you the difference. If it sells for less, in some states the bank will be able to come after you for a deficiency judgement to make up the difference.

What Is Foreclosure?

Foreclosure is defined as:

the legal procedure for satisfying claims against a mortgagor in default who has not redeemed the mortgage: satisfaction may be obtained from the proceeds of a forced sale of the property

This means that foreclosure is the process by which the bank takes your house to satisfy your debt.

When you borrow money for a home, you are taking out a secured loan. This is distinct from unsecured debt, such as credit cards, because there is an asset guaranteeing the loan. The house is that asset. If you do not pay your bills, the bank can take the asset- the house- and sell it to get the money owed. This makes mortgages a less risky loan for banks, since they know they can always fall back on selling the house if you don't pay your bills. This is why mortgages have a lower interest rate than credit card debts or personal loans.

Avoiding Foreclosure

Banks normally do not want to foreclose on a home, as it is expensive and time consuming. You may be able to avoid foreclosure, and the damage it does to your credit score, by negotiating a deal with your lender or arranging for a short sale (a sale of the home in which the bank agrees to accept less than what the home is worth as full satisfaction of the debt). It is always best to talk to your lender to try as much as possible to avoid foreclosure.