What Is Foreclosure?
In exchange for a loan, the lender
holds a lien (a legal claim or a "hold") against the property.
If the borrower does not make the stipulated payments, then the
loan goes into default. The lender can then exercise the lien
against the property. This is to take legal possession of the
property, and then sell it to clear the debt. This process is
A property is put as collateral for a loan or mortgage. When the
borrower fails to make payment under the loan agreement, the creditor
is entitled to repossess the property. This is usually done through
an agent. The lender then sells it to get back the money he loaned
to the borrower.
Foreclosure starts as soon as the first payment is missed.
NOTE: Defaulting on a payment can
cause a serious drop in the borrower's credit rating. Each
sequential late payment continues to damage the rating, which
in turn makes refinancing much more difficult. Lenders
will often charge a penalty of around 5% for each payment deadline
When a person falls behind on their mortgage payments and they
have defaulted on their debt, the bank may foreclose.
It does this by filing a lawsuit in order to get a court order.
It's unlikely that this will be granted on the first hearing.
Instead a suspended repossession order will likely be granted,
which the borrower must abide by. This will include having an
agreed a payment with the lender to reduce the arrears balance
over a period of time.
If these payments are not met, the lender can apply for the repossession
court order. The court is now likely to grant this. Once the court
declares foreclosure, the lender will auction it off, with the
highest bidder buying the property.
There is a waiting period between the date of the lawsuit and
the foreclosure sale, which is often between three and twelve
months depending on the local foreclosure law.
Depending on the jurisdiction, the lender may publish a foreclosure
advertisement, according to the relevant foreclosure law, at least
thirty days before the auction, once a week, for up to three weeks.
Before the first advert is placed, the property owner may need
to obtain a sheriff's 'notice of foreclosure sale'. As soon as
the sale is over, the sheriff gives the title deed to the new
The lender will attempt to sell the property quickly to recoup
their money. They typically use auctions and estate agents. Sale
price is often discounted to attract a speedy sale. When
the property is sold, the lender's account is cleared first.
Any surplus will be repaid to the homeowner. If, however, there
is any shortfall, the lender can attempt to recover it from the
individual involved for a period of up to twelve years!
If you are facing the spectre of foreclosure or repossession it's
importantly that you find out all your options, then move quickly
and decisively. Lenders are playing a numbers game: which
is more profitable; getting you out and selling the place, or
waiting to see what you can come up with? With each day that passes,
interest, arrears and legal fees rise, raising the odds against