Foreclosure is a legal process that lets a lender seize possession of a house or other real estate. It’s what typically happens if a homeowner doesn’t pay their mortgage.
Mortgages are risky for lenders. To provide some protection, the borrower’s house acts as collateral for the mortgage—which means the lender can seize the house if the borrower doesn’t pay.
Mortgage documents include a foreclosure clause. If the owner stops making payments, this lets the lender evict a homeowner, take control of the property, and sell the house to recoup some costs.
While there are some differences from state to state, a foreclosure usually goes like this:
Homeowner misses mortgage payments
Notice of default.
Issued by the lender if the homeowner doesn’t try to catch up on payments
Notice of sale.
Lender indicates its intent to sell the property
Lender sells the property
Banks don’t usually start the process until the owner is a few months late on payments. (And the lender usually gives the owner a chance to catch up on payments first.)
Foreclosures can be either voluntary or involuntary:
They can also be either judicial or nonjudicial:
|Main difference||Lender has to go to court to get the “ok” to foreclose.||Lender can foreclose without going to court.|
|How common is it?||More common. (Used in 45 states.)||Less common. (Used in 30 states.)|
|How long does it take?||Longer. Often takes a year or more.||Shorter. Can happen in a few months or less.|
If a homeowner falls behind on their mortgage, there are usually a few options available instead of foreclosure:
Foreclosure, short sale, and deed in lieu can all hurt your credit score for years. None of these are steps to be taken lightly, which is why experts typically recommend that you never take on a mortgage that’s larger than you can truly afford.
Foreclosure is when a lender takes a property away from a homeowner if the owner is missing mortgage payments. The lender can then sell the house to recoup what it’s owed. Lenders often give homeowners the chance to make up missed payments or sell the house for less than it’s worth before foreclosing.