Banks are undertaking foreclosure proceedings on defaulted home loans at a record rate. This process has left many people homeless. However, there are still some that are left wondering, "What is a foreclosure?".
Foreclosure is the legal process by which a bank or other lender forces the sale of a home on which they own the mortgage. It can not be undertaken until the homeowner is behind by a certain number of payments on that mortgage. In most cases, it will not be undertaken until the bank is fairly certain that the owner has no intention of paying the loan in full.
The process begins with a bank or lender sending the owner a letter of demand stating that all past due payments must be caught up to date by a certain time. The condition is that failure to do so or to make satisfactory arrangements with the lender will result in the acceleration of the loan so that the full amount is due.
The next step is the for the local police or sheriff's department to receive a notice of foreclosure that must be served on the property. This notice will detail when the homeowner must vacate the premises preparatory to the property being sold at auction.
On the date named on the Notice of Foreclosure, the sheriff will sell the home or property at auction to the highest bidder. The proceeds of the sale are turned over to the lender as payment on the mortgage. In almost all cases, the lender loses money on the loan by undertaking this process. In many cases, the deficit in payment becomes an unsecured debt on the part of the homeowner and subject to judgments, wage garnishments, etc.
Once the process is complete, the person or persons who defaulted on the loan have no interest in the property whatsoever, regardless of the number of years they had paid on the mortgage or the equity they had built up in the property. The lender also has no interest in the property unless they finance the purchase at auction, which is unlikely.
Fortunately, there are several points along the way in the process where the owner may contact the lender and make satisfactory arrangements to repay the loan. This may be in the form of a forebearance on past due payments, loan modification to produce lower payments and/or extend the length of the loan, or completely refinancing at a lower interest rate for a longer term.
Because lenders tend to lose money when they exercise foreclosure proceedings on a property, most are quite happy to work with individuals or families who are experiencing a temporary financial hardship. They will take into account certain factors such as when the family expects to be back on their feet financially, what caused the hardship, plus a few other details.
It is the responsibility of the homeowner to produce financial documents that support the claim of financial hardship and a forecast of when the hardship is expected to end. Most lenders will work with borrowers who keep in contact and show a genuine effort to meet the loan requirements.
Understanding what is a foreclosure can help borrowers find ways to avoid the process and keep their homes. Losing a home to foreclosure can damage a person's credit rating so severely that it becomes almost impossible to obtain financing in the future. This can severely limit the person's ability to purchase another home in the future. It is important to know that, even after the process has begun, there are opportunities for the borrower to halt the process and maintain possession of their home if they are serious about honoring their obligation.