When a home goes into foreclosure, the owner has fallen behind on their mortgage payments, which prompts the lender (often a bank or financial institution) to file a lawsuit to reclaim the property. By compelled sale of the asset used as collateral for the loan, foreclosure is a legal procedure utilized by the lender to seek to recoup the unpaid loan sum.

The steps involved in the foreclosure process can vary based on the jurisdiction and the particulars of the mortgage, but they normally go like this:

Default

Default occurs when a borrower repeatedly skips mortgage payments and doesn’t address the situation within the allotted grace period. After that, the lender states that the loan is in default.

Notice of Default

The lender notifies the borrower of the default and the potential for the start of foreclosure proceedings by sending them a notice of default.
Pre-foreclosure: During this time, which is normally set by state law, the borrower has the option of making up any missing payments, negotiating a loan modification with the lender, or short-selling the property to recoup the debt.

Auction of Foreclosure

If the borrower doesn’t correct the default within the allotted time, the lender may organize an auction of foreclosure. The revenues from the sale of the property to the highest bidder are then used to pay off the remaining loan sum. In some circumstances, if no other bidder provides a higher price, the lender may become the owner of the property, giving rise to what is known as a “bank-owned” or “REO” (Real Estate Owned) property.

Eviction

If the previous owner hasn’t already evacuated the property, the new owner (whether it’s the lender or a third-party buyer) may start the eviction procedure after the property has been sold at the foreclosure auction.

Deficiency Judgment

The lender may pursue a deficiency judgment against the borrower to recover any unpaid loan balance if the proceeds from the foreclosure sale fall short of doing so. However, this is dependent upon local legislation as well as the particulars of the mortgage.

For the borrower, foreclosure can have detrimental effects on their finances and credit. It may become challenging for them to get new credit, rent a house, or find work in some circumstances because it might drastically impair their credit score.

For homeowners and their families, the foreclosure process can also be emotionally and mentally exhausting.