Definition
Foreclosure is the legal process by which a lender takes possession of a property after the homeowner fails to make mortgage payments. Once the borrower defaults on their loan, the lender can seize the property, sell it, and use the proceeds to recover the unpaid mortgage balance.
Explanation
Foreclosure typically follows a multi-step legal process and can significantly impact a homeowner’s credit score, future borrowing ability, and financial stability. It usually begins after several missed mortgage payments, at which point the lender issues a Notice of Default (NOD) and gives the borrower time to resolve the issue. If the borrower fails to catch up on payments or work out a solution, the lender can initiate a foreclosure sale, often through a public auction.
Foreclosures generally fall into two categories:
- Judicial Foreclosure – Requires the lender to file a lawsuit and obtain court approval before repossessing and selling the home.
- Non-Judicial Foreclosure – Allows the lender to foreclose without going to court, following procedures outlined in the mortgage agreement and state laws.
Homeowners facing foreclosure have options to prevent or delay the process, including loan modifications, repayment plans, or selling the home through a short sale or a deed-in-lieu of foreclosure.
Example
A homeowner loses their job and falls six months behind on their mortgage. The lender issues a Notice of Default, giving them 90 days to resolve the delinquency. Unable to catch up on payments, the homeowner’s property goes to a foreclosure auction, where it is sold to a new buyer. As a result, the homeowner’s credit score drops significantly, making it difficult for them to qualify for another mortgage for several years.