Foreclosure is the procedure by which a party who has loaned money secured by a mortgage or deed of trust on real property (or has an unpaid judgment), forces the sale of the real property to recover the money due, unpaid interest, plus the costs of foreclosure, after the debtor fails to make payment. The lender must serve a notice of default on the debtor after a certain time period from when the payment becomes past due, which varies by state. The notice will give the borrower a certain time period and amount necessary to be paid in order to "cure" the default and avoid foreclosure. If the delinquency and costs of foreclosure are not paid within this time, then the lender (or the trustee in states using deeds of trust) will set a foreclosure date for selling the property at public sale. The property may be redeemed by the borrower by paying all delinquencies and costs, up to the time of sale and in some state, for a period after sale.
There is also judicial foreclosure which is used in several states with the mortgage system or in deed of trust. This procedure is used when the amount due is greater than the equity value of the real property, and the lender wishes to get a deficiency judgment for the amount still due after sale. However, some states give deficiency judgments without filing a lawsuit when the foreclosure is upon the mortgage or deed of trust.
A buyer who makes less than a 20% down payment will typically have to pay for foreclosure insurance, called private mortgage insurance (PMI), which will pay the bank if the home gets foreclosed on. Some of the leading causes of bankruptcy have been cited as overspending, loss of employment, predatory lending practices, divorce, and medical emergencies.
It is suggested that a person in risk of foreclosure try to work with the lender to prevent the foreclosure. The lender may be willing to give the borrower extra time to pay, or may suggest debt counseling to restructure or consolidate the debt. It may be possible to create a trust account to protect the debtor's assets, or rework the loan for an extended period of time to lower the monthly payments. The past due amount could be added into the new loan. A debtor will sometimes sell the home to pay off the delinquent amount. A voluntary foreclosure involves selling the home to the lender. Voluntary foreclosure may be pursued to minimize the damage to the debtor's credit record associated with involuntary foreclosure. In a voluntary foreclosure, the debtor not be held liable if the home sells below the debt amount. Due to the loss of financial control and credit damage involved, bankruptcy is generally viewed as a last resort to avoid foreclosure. In bankruptcy cases, the lender is
entitled to apply to the court for relief from the automatic stay to allow it to continue foreclosure proceedings.
After the sheriff sale, the bank will have to request that the court order the former owners and current unlawful occupants to be evicted from the house. Usually all that is required to get an eviction order is proof that the title was transferred on the day of the sheriff sale. Therefore, as the new owner, the lender has the right to determine who lives on the property. After the foreclosure victims have exhausted their options to stop foreclosure with no success, and the sheriff sale has been conducted, the eviction process will typically begin very soon.
Other types of foreclosure include foreclosure by power of sale and strict foreclosure. Foreclosure by power of sale is allowed by many states if a power of sale clause is included in the mortgage. This process involves the sale of the property by the mortgage holder without court supervision. It is generally quicker than foreclosure by judicial sale. Strict foreclosure is a process available in a few states which allows the mortgagee to petition the court for foreclosure, and if granted, the court will require the mortgagor who is behind in payment to make payment within a specified time. If the mortgagor fails to do so, the mortgage holder gains the title to the property with no obligation to sell it. This type of foreclosure is generally available only when the value of the property is less than the debt.
When the lender makes a motion for an eviction order, the foreclosure victims have an opportunity to raise any violations of required procedure in their defense. Procedures vary by jurisdiction, so local law needs to be consulted. The owners will always get a chance to respond to any motion the bank makes in court, and the lender's attorneys often violate some rule of procedure, which include state laws, county rules, and specific court rules. However, the foreclosure victims need to consider whether they want to answer every motion the bank brings and drag out the process, which will increase the legal fees that will eventually be added to the total payoff.