A mortgage is a pledge by the borrower to offer any of the property owned by him/her as collateral when taking out a loan. Foreclosure, basically, is calling in this collateral when the borrower has not met the terms of the loan. In other words, it is a legal proceeding where the lender or the lending institution gets a court order to terminate the right of a borrower to recover the property that has been put up as security against the loan.
If the borrower defaults and the lender tries to repossess the property, courts can grant the owner the right to get them back if the borrower repays the debt. In case this right exists, the lender cannot be sure if the borrower will successfully repay the money. To avoid such a situation, the lender opts for the procedure of foreclosure.
Once the entire foreclosure process is complete and the borrower has failed to comply with the terms of the mortgage loan, the lender can sell the property and use that money to pay off the loan and legal costs. If the sale does not result in enough money to pay the principal and fees, the lender can file a claim for a deficiency judgment.
How It Works
The process can be fast or slow, and varies from state to state. Other options, such as refinancing, alternate financing, temporary arrangement with the lender, or even bankruptcy may give the owners a way to avoid foreclosure.
Different types of foreclosures are mentioned below:
- Foreclosure by judicial sale - The mortgaged property is sold under the supervision of the court. The lender takes the part of the sale to cover the loan amount taken and if anything remains, the balance is given to the mortgagor.
- Foreclosure by power of sale - This is the same as foreclosure by judicial sale, except for the fact that the sale of the property is not done under the judicial supervision.
- Strict foreclosure - This is a rarely used, but the original form of foreclosure. This process begins with the mortgagee seeking the assistance of the law to get back the money. The court orders the mortgagor to repay the money within a specific period of time. In case the mortgagor fails, the property is taken by the lender who then has all the rights to sell it.
Foreclosure has obvious drawbacks, but it also has benefits you may not have considered. If you are foreclosed on, your property will be used to settle your debt. So, the unaffordable payments towards the loan you took will be taken care of. This may be a substantial benefit, especially if you need to begin recovering from the financial crisis, because mortgages usually take away a huge part of the borrower's monthly income.
Foreclosure usually costs a lot. Borrowers, who become defaulters, lose their property to foreclosure. The main loss is the property and its value. Usually the charges for judicial transactions are paid from the proceeds of selling the mortgaged property. In certain cases, the mortgagor may get some amount, if there is anything that remains of the sale value.
Normally, the mortgage loan documents will stipulate when a lender may initiate foreclosure. It is often undertaken after the agreed upon period of time has elapsed since the default. As already mentioned, in the United States of America and many other countries, there are different types of foreclosures, and the timing of initiation of the process may vary accordingly.
Any lender who has offered mortgage loans may foreclose on a property, ranging from your local and national banks to institutions specializing in local lending.