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What Is a Foreclosure? | How Does Foreclosure Work?

Christy Bieber
By: Christy Bieber

Our Mortgages Expert

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What is a foreclosure? Every homeowner and home buyer should be able to answer this question. A foreclosure is a devastating financial event that takes years to recover from. If you're taking out a mortgage loan, you need to understand what a foreclosure is, how they happen, and how you can avoid one.

What is a foreclosure?

A foreclosure is when a mortgage lender goes through a legal process to take and resell your property because you defaulted on your home loan. If you stop paying your mortgage and are more than 120 days delinquent, your lender can foreclose on your home and sell it at a foreclosure auction or take possession of it.

Lenders foreclose to recoup the money you owe if you don't pay it. If you borrowed a government-backed loan, such as an FHA mortgage or VA loan, the government also insures the loan so lenders face less risk of loss if the home doesn't sell for enough to pay back what's owed. That's one reason FHA and VA loan rates tend to be lower for high-risk borrowers than conventional loans without government guarantees.

Why do foreclosures happen?

"What is a foreclosure?" is an important question for homeowners. But borrowers also need to know why it happens.

Foreclosures occur because your home acts as collateral guaranteeing your mortgage loan. If you don't pay your loan as promised, the lender can seize the collateral -- your house -- and sell it to recoup the money they've lost due to your default.

The lender has a legal right to take your property via foreclosure because you agree to give them a lien (a claim on the property until the debt is repaid) on your home when you borrow the money to buy it. This is why a mortgage is referred to as a "secured loan." And it's one big reason mortgage rates are much lower than the rates on unsecured debt, such as most personal loans.

How do foreclosures work?

If you're wondering "what is a foreclosure?" it helps to know how they work. Lenders must follow a specific process for foreclosure. The steps vary depending on whether you live in a state requiring judicial foreclosure or one permitting nonjudicial foreclosure.

In a judicial foreclosure state, lenders can file a lawsuit after you've fallen 120 or more days behind on payments. You can challenge the foreclosure or let it proceed. If you don't successfully contest foreclosure, the court approves the sale of your property at auction. Someone will either buy it or, if no bid meets the minimum asking price, the lender takes ownership.

In a nonjudicial foreclosure state, your lender won't have to go to court. They must give you notice and time to redeem the loan after you're at least 120 days behind. If you don't pay what you owe, the property can be auctioned and will either be purchased or become a bank-owned property.

How long does foreclosure take?

It's easy to answer the question, "what is a foreclosure?" but it's harder to say how long foreclosure takes since the answer can vary by lender and by state. In general, however, foreclosures usually take six months to a year or more in complex situations.

Lenders are generally not allowed to take action until you are at least 120 days delinquent. Some lenders act immediately after this minimum period while others wait longer. And some states require more notice before foreclosure than others or mandate a longer redemption period during which buyers can become current before a foreclosure auction.

What is the foreclosure process?

Now you know the answer to "what is a foreclosure?" -- but how does it happen? The foreclosure process depends on where you live. However, these are the general steps in the process:

1.You fall behind on mortgage payments

Under the Dodd-Frank Act, lenders can't take action to begin foreclosure until you are at least 120 days late on paying.

2. Your lender takes action

This may involve giving you notice in a nonjudicial foreclosure state or going to court in a judicial one.

3. You have time to respond

In a judicial foreclosure state, you can contest foreclosure in court by responding to the lawsuit. In a nonjudicial state, you should be given time to redeem the loan or work out a payment plan to avoid foreclosure.

4. The home is auctioned

If you don't respond and successfully contest the foreclosure or work out an agreement with your lender, your home can be sold at auction. If no one purchases it for the minimum amount, ownership reverts to the lender.

Still have questions?

Here are some other questions we've answered:

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  • Foreclosure is a legal process by which a lender seizes the collateral guaranteeing your mortgage loan: your home. After you are 120 or more days late, the lender can start foreclosure to have your home sold to pay back what you owe. That's because when you borrow to buy a house, the mortgage lender puts a lien on the home. This entitles the lender to take and sell the property if you default on payments.

  • Depending where you live, foreclosures are either judicial or nonjudicial.

    In judicial foreclosure states, lenders can file a court case after you're at least 120 days late on paying. If you don't go to court and successfully contest foreclosure, the court will order your home to be auctioned.

    In nonjudicial foreclosure states, lenders can arrange an auction without court approval after you're at least 120 days late and after they provide required notice and an opportunity to get current.

    In either case, your home will be sold at auction or revert to the lender if no buyer pays the minimum asking price.

  • Foreclosures happen if you stop paying your mortgage. In a foreclosure, lenders can legally force the sale of your home. When your home is sold at foreclosure, lenders use the money to pay back what you owe so they aren't out the funds if you defaulted.

Our Mortgages Expert