How does home foreclosure work?

In today’s slowing economy, homeowners are facing foreclosures in increasing numbers. With debt rising, unemployment rates rising, and credit unavailable, many families are falling behind on their bills and eventually have no choice but to default on their mortgages.

Because home foreclosure is a dominant topic in the news, it’s important to understand what foreclosure means and how the process works.

Foreclosure is essentially the forced sale of a home. If a borrower defaults on their mortgage payments, the lender (or other lienholder) has the right under the mortgage contract to legally repossess the property. The mortgage holder can then list the property for sale. The sale proceeds must be used to pay off the outstanding loan balance. After the loan is settled, any remaining lienholders are reimbursed and the remaining equity (if any) is returned to the borrower.

The actual process of home foreclosure varies from state to state, but in most cases the same basic process applies.

First, the loan will default, which means the borrower will stop making payments; the borrower falls into a so-called payment default. The default period lasts approximately three months during which the lender attempts to contact the borrower to arrange repayment.

Once the loan defaults, the lender files a public foreclosure notice announcing their intention to foreclose on the property. The borrower is then notified, either in person or by publication in a newspaper, that the property is going to be foreclosed on.

At that time, a date for a court hearing will be set. While the court hearing is pending, the borrower can still negotiate with the lender to agree on a repayment schedule. During this time, the borrower can stay in the apartment. If no settlement is agreed, enforcement is usually approved by the court.

Once the lender has been granted foreclosure, the residents can be evicted by the sheriff and the property sold. Foreclosure properties are sold either through normal real estate processes or through public auctions. Depending on the exact procedure for each state, the entire process can take anywhere from 2 months to a full year.

After the foreclosure notice is filed, a homeowner receives many email offers to refinance or buy the home. Not all of these are legitimate and it is advisable for the borrower to deal directly with the mortgage holder to avoid foreclosure.