About Foreclosure

Foreclosure is a legal process that is related to mortgages and trust deeds. It typically involves a lending party and a borrowing party. When the borrowing party fails to repay the loan amount on time, the mortgaged or the trust deed property is sold off by the lender to recover the amount of loan that has not been repaid.

Lenders do this mainly because even though the property carries some kind of value, they would rather have the loan amount repaid by one means or the other. The sale usually takes place by the means of an auction where the starting bid is the amount that the lender needs to recover.
Even though the basic idea behind foreclosure is a simple one, the process itself can be very long winded and complicated. There are several options in the debtor’s hand for avoiding foreclosure or for stalling the auction. This is the prime reason why auctions might get delayed or they might never take place at all.

The debtor may successfully file for a renewed contract with the lender. In this case the loan becomes current and the terms of repayment are renewed. This usually means that the debtor has provided enough evidence of his/her ability to adjust the defaulted amount within a period of months. This procedure is similar to the procedure of proving your income and expenditure when applying for a loan.

The debtor may also file for bankruptcy, which will buy some time if it is accepted. But this will have lasting effects on the person’s credit ratings. Any such step should only be taken after consulting a real estate lawyer or counselor.

The different laws at different locations determine how much time the process may take. Like in case of mortgages, the debtor might be able to live in the house for up to a year. But in case of trust deeds, the debtor will usually be given four months till eviction.

The auction is done under an official supervising authority like a county sheriff or directly under the court (judicial sale). The lender or the noteholder (the one who has been promised the money) may choose to either start the auction at the amount of principal that is left to be paid or start it at a lower price. The bid is started at a lower price only if the property is considered to be lower in value than the remaining amount.

In the event that the property is not sold because it failed to get an acceptable bid, the property might remain as a real estate owned by the lender (REO). These properties then are usually sold through the usual real estate channels.

If the auction is successful, then the amount raised is first used to adjust the loan amount that was left. If a balance remains, it is given to lien (right to property) holders if any exist. Finally, if a balance still remains, the borrower will get the money. And that is how lenders and lien holders recover money from defaulting mortgaged properties.