Foreclosure is the legal process undertaken by a lender in order to acquire possession of a property used as collateral for a mortgage when the borrower defaults.
When a borrower has defaulted and deem to be in delinquency, a lender will have the legal right to start foreclosure proceedings.
Sometimes, a deed in lieu of foreclosure allows the transfer of the property to the lender without going through the foreclosure process.
The foreclosure process can be separated into two categories:
- Mortgage
- Deed of trust
This is because different states have different legal practices to securing real estate loans to property.
A mortgage consist of two parties:
- Mortgagor (borrower)
- Mortgagee (lender)
While a deed of trust consist of three parties:
- Trustee
- Trustor (borrower)
- Beneficiary (lender)
As one might expect, because of the different ways home loans are legally structured in different states, the implications on legal action for foreclosure can also vary.
Whether the foreclosure occurs in a mortgage state or deed of trust state will determine the various stages of foreclosure.
A mortgage state would proceed with s judicial foreclosure, while a deed of trust state would proceed with a nonjudicial foreclosure.
Without going into details of the stages in both types of foreclosure, both events will lead up to an auction, or sheriff’s sale, whereby the public will be given a chance to bid for the property in question.
The lender puts up the opening bid at the price equal to the balance amount that is owed by the borrower.
Should there be no other bidders, the lender acquires the property at the bidding price.
Should there be other bidders, the proceeds of the sale will be used to settle the loan amount outstanding to the lender. With the excess returned to the original owner.
With that said, it must be noted that the defaulting borrower will have various opportunities during the whole process to reinstate the loan and bring everything back to normal the way it was before the default.
Even when the property is sold to the highest bidder, the borrower would usually still retain the rights to redemption during a redemption period to pay off the debt and keep the property for himself.
Investors are known to frequent foreclosure auctions to acquire valuable real estate on the cheap.
Many investors also make it a habit to attempt to acquire the properties directly from the owner by striking a deal to activate reinstatement or redemption rights.
Throughout the process discussions between lender and borrower can be ongoing with the goal of finding a middleground that meets the needs of both parties.
After all, the last thing a lender wishes to do is to foreclose a home. They are in the lending business instead of real estate.