| Short Sale Specialists |
3 Stages of Foreclosure
Foreclosure In Brief: What It Is, How It Works.
Foreclosure is the
process where a lender can sell or repossess (take ownership of) a property
in order to recover the amount owed on a defaulted loan secured by the property. Anyone worried
about missing their mortgage payments should understand how foreclosures work.
State laws govern the foreclosure
process. Procedures vary from state to state. You'll want to check with your
own state to learn the details, including whether a judicial procedure is required.
Knowing the timeline and process in your state helps you shape the most effective
strategy and avoid procedural pitfalls.
3 Stages
of Foreclosure
Following is a broad-brush summary of the three stages of foreclosure.
We've assumed the homeowner/borrower fails to satisfy the repayment obligation
along the way.
Stage 1: Pre-foreclosure
This stage begins when the homeowner falls behind on home-loan
payments (or sometimes other terms of the loan). Lenders may wait for a second,
third, fourth or even more missed payments before sending the homeowner a notice
of default - which becomes public record. The homeowner then has a given period
of time to respond to the notice and/or come up with the outstanding payments
and fees - sometimes by selling the home in a pre-foreclosure sale. (If a judicial
procedure is required, it occurs after the notice of default is given.)
One type of pre-foreclosure
sale is a short sale - when proceeds from the home sale are less than the amount
of mortgage still owed to the homeowner's lender (also known as being "under
water" or "upside down" because the seller would need to "leave
money on the table" if the lender doesn't agree to the short sale). A lender-approved
short sale (or short payoff) occurs when the homeowner's lender agrees to accept
the proceeds of the "distressed" home sale as satisfaction of the
mortgage owed, even though proceeds are less than the outstanding debt.
Stage 2: Foreclosure
At this stage, the former homeowner may or may not have been
evicted (depending on state law) when the lender puts the home up for public auction "on the courthouse steps" (after a judgment of foreclosure
in those states requiring judicial procedure).
If the home sells at auction,
money from the sale is used to pay off the costs of the foreclosure, taxes and
other prior liens, service charges and advances, interest and principal on the
mortgage, late charges or fees, and liens recorded after the first mortgage.
Any amount left over is paid to the borrower (former homeowner). When proceeds
from the sale are less than the various amounts owed, the lender may be able
to hold the borrower responsible for the difference.
Stage 3: Post-foreclosure
When a property that does not sell at auction - either because
no one bid on it or bids were too low to cover the outstanding loan - the property
becomes real estate owned (REO) by the lender (or government agency that guaranteed
the loan - HUD, VA, etc.). The "bank owned" property is put back on
the market for sale, usually listed through a real estate broker.