Foreclosure is a process that enables the lender to recover the amount owned on the defaulted loan by selling or taking ownership of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on mortgage payments and the lender files a public default notice in the paper, called a Notice of Default or Lis Pendens.
The foreclosure process can end in one of 4 ways:
1. The borrower reinstates the loan by paying off the default amount during a grace period determined by state law, otherwise known as pre-foreclosure.
2. The borrower sells the property to a third party during the pre-foreclosure period. The sale allows the borrower to pay off the loan amount and avoid having a foreclosure listed on their credit history.
3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
4. The lender takes ownership of the property with the intent to re-sell the property on the open market. The lender can take ownership either through an agreement with the borrower during pre-foreclosure or buy back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).