How Does Foreclosure Work?

How does foreclosure work? The foreclosure process follows a strict set of legal steps which can differ slightly from state to state. You need to understand the concepts so that if you are at risk of foreclosure, you can take the necessary steps to minimize the damage to you of the foreclosure process, if not completely stop the foreclosure.

In the broadest sense, the following is usually how foreclosure works.

Your mortgage payment falls into arrears usually due to some form of hardship and you are considered to be in default. The lender will usually send you a letter noting this, and demand that you rectify the situation immediately. The letters of demand from the bank will continue for two to three months if you don't catch up on your mortgage payments. By now you will have been reported to credit agencies and your credit rating will be damaged.

If you don't pay up, the bank will initiate the foreclosure process against you. Your home will be put up for auction and once sold, the proceeds from the sale will be used to pay off your loan. If the proceeds of the sale don't cover the loan, then you may or may not be liable for the outstanding amount.

Special conditions also apply to second mortgages that are not able to be settled by foreclosure. Whether you are held liable for outstanding amounts on first mortgages will depend on which state you live in and the type of foreclosure process, either judicial foreclosure (foreclosure by judicial sale) or foreclosure by power of sale. You are usually held liable for outstanding amounts on second mortgages due to the fact that the borrower signs a promissary note when setting up a second mortgage.

Enjoy this page? Please pay it forward. Here's how...

Back from How Does Foreclosure Work? to Home