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How the Foreclosure Process Works

Foreclosure is a legal process whereby a lien holder (usually the lender from whom a homeowner received their mortgage) seeks to have any stake the homeowner has in the property legally nullified, so that they can sell the property to recover their investment. When you apply for a mortgage to buy a home, you agree to put the house up as collateral for the loan. Essentially, the bank owns your home until the loan has been repaid. The terms of this deal are outlined in your mortgage. When you fail to make a payment, that typically counts as violating the terms of your mortgage agreement, which opens up various forms of retribution for the lender.

The foreclosure process varies by state and you should review the laws in your state to determine which of the foreclosure options listed below are available to lenders. Most states offer judicial foreclosure, which relies on the state's court system to make judgment. Depending on the laws and methods that are available in your state, the foreclosure process can be quick or drawn out and you may need to obtain legal council to fight the proceedings.

If the lender succeeds in the foreclosure proceedings, the foreclosed property is typically sold at auction and the money received is used to pay off the lender and any other liens against the property such as property taxes or second mortgages. The proceeds from the sale of the property at auction may not cover the amount owed to the lender, which is the case in many recent home foreclosures because of the bursting of the housing bubble and the rapid decline of home prices that dropped the value of homes below their market value at the time of purchase. There are additional remedies available to lenders in these instances that allow them to recover the difference in the amount they are owed and the amount they received for the sale of the house at auction. For more on this refer to our section on deficiency judgments.

State law also determines at what point during the foreclosure process the mortgagee can force the homeowner out of their house. If the homeowner does not leave at the behest of the lender, local eviction proceedings are usually invoked. However, the recent rise in foreclosures has seen many homeowners simply abandoning their homes and in some cases even purposely inflicting damage on the property. To combat this, lenders will make a "cash-for-keys" offer to the homeowner.

Understanding the Foreclosure Process