What is Foreclosure?

A foreclosure by judicial sale (most commonly known as a foreclosure) is the process of the bank (lender) launching the legal process to sell the borrower’s home under the supervision of the court because of the homeowner’s failure to comply with terms and conditions of the loan agreement (paying their monthly mortgage) signed by both parties upon purchase of the home. 

A simpler definition:  The bank takes the homeowner to court for failing to pay them the contracted debt.  In most cases, if the homeowner fails to pay the mortgage the lender serves the homeowner a subpoena initiating the process.  There are multiple types of Foreclosure. The list follows:

  • Foreclosure by Judicial Sale - See above.
  • Strict foreclosure-Please note this option is involved only when the home/property is valued for less than the loan.  Many states allow the homeowner to appeal the judicial decision on foreclosure.  If the outcome favors the homeowner the court will set a hard date for the borrower to pay their current and past due mortgage payments to the borrower.  If the homeowner fails to meet their obligation the lender will obtain title of the property.
     
  • Foreclosure by Power of Sale – Twenty-nine states approved this process of foreclosure if the borrower and lender agree upon it prior to the approval of the loan.  The agreement is entered as a clause in their agreement.  Foreclosure by power of sale occurs when the borrower defaults on his/her loan and the lender, per terms of the contract, initiates the right to sell/auction the home without going through the judicial process. 

Note:  When a foreclosure occurs the proceeds from the foreclosure and/or sale of the home are distributed in the following order:

  1. The mortgage/mortgage holder(s) to fulfill any outstanding obligation
  2. Other lien holders to fulfill any outstanding obligations
  3. Remaining proceeds are provided to the mortgagor

Please note not all foreclosures are involuntary.  A borrower has the ability to initiate a foreclosure.  This is legally known as a voluntary foreclosure or Deed in Lieu of a Foreclosure.

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