What Happens During A Foreclosure?

The word foreclosure has been popping up all over the media. If you’ve never experienced a foreclosure, you may not know exactly what happens during a foreclosure process.

A foreclosure is the last step of a long process where the lender tries to recapture their money. It will start with a pre-foreclosure once a borrower has missed their first payment and the lender will send a late payment notice. If the notice is ignored and another payment is missed, the lender may demand for a full payment. Not only will the homeowner owe the balance of the mortgage but any late payments, legal fees and late fee penalties. Once the acceleration clause has been evoked, the bank will not accept anything other than full payment. Then the foreclosure process begins.

The mortgage servicer will send a certified letter of foreclosure to the homeowner. The lender will publish a legal notice in the paper of the pending foreclosure. A court date is set at which the homeowner, lender and any other party with financial interest in the property will attend. Next the lender publishes the note of foreclosure and lists a date for auction in the paper. The homeowner is allowed to try to work out a settlement with the bank.

When the auction date arrives, anyone can participate but needs to have a deposit check for the stipulated minimum and financing lined up to take over the property. At most auctions, the lender will make a bid enough to cover the remaining costs on the property. So unless the homeowner has a great deal of equity on the property, the lender will normally win the auction. When the auctions closes, the purchase contracts are issued between the auction winner and the mortgage lender. A closing date is set if the highest bidder is not the lender.

The money from the auction sale goes to pay the real estate taxes owed, mortgages, other liens and creditors who filed at the court hearing…and if there is any money left over, it will go to the original homeowner. If not enough money was recovered at the auction, the original homeowner is responsible for the difference, although it is now considered unsecured debt since they no longer own the house. After the auction, there is normally a redemption period which can vary state-to-state during which the original owner can buy back the house if they can get financing. During this time, the homeowner does not have to leave the house until the auction is finished and the closing happens. If the homeowner doesn’t leave the property after closing, then the new owner can file evictions. The process from pre-foreclosure to auction takes normally around 6 months.