Home Mortgage What is Foreclosure? How it works and phases

What is Foreclosure? How it works and phases


Breaching your mortgage contract may cause you to lose your assets through foreclosure. When desperate for financial aid, it is common for borrowers to sign away valuables without a moment of hesitation.

Once lenders have your promissory note, they have the right to impound your property to recover your debt. Many people have become homeless through this process, which often leads them to great depression.


However, foreclosure doesn’t occur abruptly. Certain situations may prompt loan companies to make harsh decisions. I’ll provide an in-depth explanation of this process in this article.

What is a foreclosure?


Mortgages often request collateral worth the value of the loan amount. Should you default on a payment agreement, they have the right to seize your assets and sell them to cover your balance. Formally, this process is termed a foreclosure.

Understanding how it works?

To begin the process, the borrower must default in payment or breach of agreement. Then, lenders can possess the asset through the judicial or non-judicial route.

For judicial foreclosure, lenders need the court’s approval before seizing the asset. If this is granted and ownership is switched, the debt is paid off from the proceeds generated after the sale.

Sometimes, borrowers may decide to contest a lawsuit by raising counterclaims. In this situation, the regular judgment may give way to an actual litigation process. Luckily, they may get the equitable right of redemption after paying off their debt; if not, they’ll have to forfeit their property.


Judicial foreclosure is long and hectic. It may take months or even years for the judge to reach a verdict.

On the other hand, the non-judicial process permits lenders to take action without seeking legal counsel. Even at that, there are still state laws to regulate the process. Unlike the court method, non-judicial foreclosure is not time-consuming.

Also Read:  What is a mortgage loan? Types and how it works


What are the phases of foreclosure?

Every state has special laws governing this process. However, here are six events that need to take place for the procedure to be complete. They include:

  • Payment default: A default occurs when a lender breaches the payment agreement or doesn’t pay their mortgage payment. The method of payment is usually discussed before signing a contract. When your mortgage is due, lenders offer a grace period, which may attract extra charges. If you still miss out on payments more than once, your lenders will reach out and offer advice to avoid foreclosure.
  • Notice of default: Usually, loan servicers give a grace period of 90 days before sending a notice of default to the borrower. They also offer them a chance to reinstate the loan if they pay off their debt before 30 days.
  • Foreclosure process: After a 120-day preforeclosure period, if the borrower makes no plans to reinstate a loan or mitigate loss, the foreclosure process kicks off. Lenders must refer to their state foreclosure laws for directions to guide the entire process.
  • Trustee’s sale: This refers to the sale of foreclosure properties through a public auction. Everyone, including the lender, can participate in the bidding process, but only the highest bidder can possess the asset.
  • Transfer of ownership: If a lender is the highest bidder from the auction, the house becomes REO (real estate owned), which can be sold through an REO asset manager. However, if a third party emerges as the highest bidder at the auction, the lender relinquishes ownership in return for cash worth the value of the house and charges on it.
  • Eviction: Throughout the foreclosure process, you are allowed to stay in your house. After the sale, your state law decides if you stay some more or leave immediately. Once the post-sale redemption period is over, the property’s new owner may offer you cash for keys. You get paid for leaving the property after your right to stay ends or get evicted after your right to stay ends.


In summary, not all mortgage loans end with the foreclosure of a borrower’s assets. You can only fall victim and pass through this grueling process if you violate your mortgage contract. 



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