What Is & How Does a Foreclosure Work?

Foreclosure is a common term, but only some know its true meaning and reason. You can only be a perfect homeowner or buyer if you know things associated with the term. Your idea about foreclosure is a good skill for getting a mortgage loan. On the other hand, the situation can be embarrassing to the homeowner, especially in times of difficulty. In this article, we’ll discuss what foreclosure is, how it works and how to avoid it. 

What is a Foreclosure?

Foreclosure comes in when a homeowner is unable to repay the loan used in buying the home. The foreclosure process is an exchange of property ownership from the homeowner to the bank or lender. However, before your home faces foreclosure, some other means to resolve the debt might have been taken but might not prove successful. 

After the window of settling the debt, the lender issues an eviction notice and possesses the home with the intent to sell it to cover the loan. According to law, if the debt is not repaid, the lender has full rights to possess the property. The lender can issue the home to a realtor for sale. 

How Does a Foreclosure Work?

The process of foreclosure could be more pretty and differs from state to state. And foreclosure is of three types, such as:

• Judicial: the method is standard because it involves the court system.

• Power of sale (nonjudicial): this method omits the court and grants your lender the right to place the home on the market.

• Strict: this method returns the property to the lender after you do not pay the debt within the ordered time. In most cases, the home is worth less than the debt.

However, every case is different, and so are the rules, but a foreclosure undergoes five stages:

1. You miss a few payments

Many borrowers face situations that result in them omitting some repayments, such as job loss, divorce, death, high-interest rate, and other bills.

2. Your lender submits a notice of default

The lender submits a notice if you fall short of payment for three to six months. The letter to the county recorder’s office will explain that you have broken the mortgage contract, and some letters will be sent to you as a reminder. The lender will also send you a letter after submitting the notice. 

3. Your home goes to the pre-foreclosure stage

After submitting the letter, you’ll be offered a pre-foreclosure stage. The letter will grant you three months or more to repay your mortgage. This leaves you with limited options; either catch up on your debt, sell your home in a short sale or offer the home to the lender with a deed in lieu of foreclosure.

4. Your lender takes the home to auction.

At times, the lender may object to the short sale, or no buyer is interested in the home. In such a case, the lender will provide a trustee to auction the home. The trustee will start the home on the amount you owe your lender. 

5. If the house doesn’t sell?

In some cases, even an auction couldn’t sell the home. In such a case, the lender or bank acquires the home, taxes, and all. At this point, the lender will want to get the home out as soon as possible to avoid incurring expenses.

How Do I Avoid a Foreclosure?

To avoid foreclosure, discuss with your lender the path forward and lay out your difficulties. The process is scary, stressful, and maybe embarrassing, but it can’t be ignored. However, you can avoid foreclosure if you air out your troubles with your lender. All it takes is a deep breath and reaching out.

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