The Fundamentals of the Mortgage Foreclosure Process

Although it may seem overwhelming, the mortgage foreclosure process is actually easy to understand. This article breaks down a typical foreclosure process, stage-by-stage from beginning to end.

Stage 1: Preforeclosure
When a homeowner signs a mortgage agreement he or she promises to make regular payments on the loan and agrees that if those fall behind or are missed altogether that the lender may take the home back through legal action. Preforeclosure, in fact, occurs when the borrower misses a loan payment and the lender files a notice of default. This first stage gives borrowers time - typically three months - to catch up on their payments, refinance their mortgage or sell their home before it heads to public auction.

Preforeclosure marks the beginning of the foreclosure process. In this stage, the lender orders something called a "Notice of Default," (it is also referred to as a Lis Pendens in other states) which tells the general public that the foreclosure process has begun for a given property. In addition to giving the borrower time to catch up on late mortgage payments, it also lets the public know there is a preforeclosure property that may be available for purchase.

Stage 2: The Sheriff's Sale
If the borrower doesn't bring the mortgage up to date within the specified timeframe, the lender will usually schedule an auction to sell the property. Once the lender chooses a time, date and place for the sale, a Notice of Sale will be issued. Like a Notice of Default, a Notice of Sale is public domain. The notice is mailed to the borrower, posted on the property itself and published in local newspapers.

The sale itself is called a "Sheriff's Sale," and it is the second major stage of the foreclosure process. A Sheriff's Sale is very similar to any other kind of auction. A typical scenario proceeds as follows:

  1. The auctioneer reads a description and any legal notices for the property in question.
  2. Bidding begins. Often, bidders must pre-qualify by providing a deposit check up front. Bidding continues until the auctioneer accepts the highest bid.
  3. The paperwork is drawn up for the highest bidder to sign. He or she is often given a grace period to arrange financing for the property. Once this is in place, the property title officially belongs to its new owner.

Stage 3: Real Estate Owned Properties (REO)
In the event that there is no bidder at the Sheriff's Sale other than the lender, the property becomes REO (an acronym for "Real Estate Owned") and ownership goes to the lender (i.e. a bank, financial group or mortgage company). This usually happens because bidders judge the property to be worth less than what is still owed to the lender.

The REO stage sometimes also occurs earlier in the foreclosure process if the borrower and the lender reach an agreement to sell the property to the lender during preforeclosure.

In either case, once someone else - either the lender or the highest bidder - signs the paperwork the major parts of the foreclosure process have come to an end.

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