A lending institution that lends money to a borrower for the purchase of a home must have a legal mechanism to protect its investment in the event the borrower defaults on the loan. Foreclosure is the legal recourse available to a lender when a borrower defaults on a loan. Foreclosure allows the lender to take back the property and sell it at auction.
Preforeclosure
Although procedures will vary by state and lender, when you fall behind on your mortgage payments, your lender will typically send you a notice regarding the delinquent payment. Most loans have a grace period that may range from five days to 30 days before the payment is actually considered late. When the loan is considered to be in default will also vary by state and lender. You will receive notification when the lender considers your loan to be in default. At that point, the lender will inform you of his intention to accelerate the loan, meaning the total amount of the loan must be paid or a foreclosure action will be initiated. During the preforeclosure stage, most lenders will work with you to try to bring the loan current.
Judicial Foreclosure
If the loan remains delinquent -- and satisfactory arrangements for bringing it current have not been made with the lender -- your lender will likely begin the legal foreclosure process. State laws vary regarding what is required to legally foreclose on a property; however, there are common procedures. In most cases, the lender must notify you by certified mail of her intention to foreclose. She will then file a foreclosure lawsuit, which must also be served on you and published in a local newspaper. Approximately 30 to 60 days later, the lawsuit will be heard by the court; at this point, the lender will be given a legal order to foreclose on the property if the loan has not been paid in full along with all costs.
Auction
Once the court has ordered the foreclosure, the lender must sell the property at a public auction. The sale is typically conducted by the local sheriff's office and must be advertised in the local newspaper. The home is then sold to the highest bidder, with the proceeds used to satisfy the debt owed on the loan. A property cannot be sold at auction before it has been foreclosed on by the lender.
Considerations
Although a home cannot be sold at auction before being foreclosed on by the lender, some states allow nonjudicial foreclosures. A nonjudicial foreclosure basically means that the lender is not required to obtain a court order before foreclosing, and subsequently selling, the home. There are still procedures that must be followed, such as proper notification to the borrower prior to foreclosure. While a judicial foreclosure often takes as long as six months to complete, a nonjudicial foreclosure can be completed in less than 60 days.
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