Foreclosure is what happens when a property owner defaults on their mortgage. After missing payments, the lien holder (usually a bank) will seek to take back ownership of the property.
Foreclosure involves the owner relinquishing all rights to the property and any contents remaining inside. The foreclosure process can be stressful to both the creditor and property owner.
The process differs from state to state, so it's important that both the home owner and lien owner know the rules for their particular state. The general process is usually the same, with the main difference being when and what notices are mailed, the steps in reselling the property, and also the tax consequences to name a few.
Obviously in order to even get anywhere near the foreclosure process the home owner has to miss a mortgage payment. After the first missed payment the lien holder will try to contact the home owner via phone and/or a letter.
This letter informs the property owner that they are delinquent and payment must be made. After the second payment is missed, the lien holder will try to contact the property owner again to find out why they aren't making their payments.
For the property owner, it's important to keep in touch with the lien holder throughout this entire process. By avoiding the creditor, it makes the process more difficult and stressful. Some banks are willing to work with delinquent real estate owners if the situation is explained.
Remember, the foreclosure process is difficult for banks as well and they try to avoid it if possible.
If the homeowner has still failed to make their payments or set up arrangements for payment, the next step occurs.
Generally after the third missed payment, the lien holder will send a letter to the property owner stating the amount owed, and give a specified date on which the payment must be paid before the foreclosure process begins. This letter is referred to as a "demand letter".
The letter usually gives the home owner about 30 days to pay the amount due plus any fees that have been assessed. Once the date on the demand letter has come, if there have been no attempts to make contact with the lien holder, the lien holder will contact their attorney to begin the next step in the process.
This part will differ depending on where you live and what is allowed. The lien holder will contact their local court and file the necessary paperwork, which will be sent to the home owner, giving them one last chance to make their payments before they are foreclosed on.
If payment hasn't been made at this point a letter is sent stating when the home owner must vacate the property and the lien holder will gain back ownership of the property. From this point, the lien holder has the option of putting the real estate up for sale as a foreclosed property or auctioning it off.
This is how the lien holder attempts to recoup some of the money lost on the property. Often times, foreclosed properties aren't well maintained so they sell for significantly less than what is owed. This brings us to the next part of the foreclosure process.
Once the property has been sold or auctioned off, the delinquent property owner may be responsible to pay the difference between what it sold for and what was owed. In some states, the lien holder may have the option of "forgiving" the difference but the delinquent owner will still be responsible for paying taxes on that forgiven amount.
This is because this money is considered as income to the IRS. At this point, the delinquent will be dealing with the IRS as opposed to the lien holder.
So as you can see, the foreclosure process can be very long and stressful for both the home owner and the lien holder. It's generally a losing situation for both parties. The lien holder loses out on all the mortgage payments that were missed and any amount that was uncollected after the property was sold.
The homeowner has caused significant damage to their credit, lost their home, and often times a foreclosure can lead to the homeowner filing bankruptcy. Knowing the foreclosure process can really help process go faster and smoother, and may help avoid issues in the future.