How the Foreclosure Process Works

When a party with a security interest in property seeks to seize and sell the property, the process to do this is called foreclosure.  There are several different types of foreclosures, and the method that is used in a particular location will be unique to that location.  Although typically used to describe the process of a bank taking a home for failing to make payments on a loan, states also allow governments to take properties for failure to pay property taxes, often called a tax foreclosure.

Before a home is actually put into foreclosure, the process begins with what is frequently called pre-foreclosure.  In many cases, this can mean as little as a homeowner has missed two mortgage payments and the bank has filed a notice of default.  In other cases, a pre-foreclosure notice is the bank’s last step before actually filing for possession.  The length of time that a home is in pre-foreclosure can vary depending on the bank and whether the bank is prepared to commit the assets that are necessary to go through the foreclosure process.  Banks generally would prefer to avoid foreclosure if possible.  They almost always lose money in the process, and they are not equipped with the personnel or the procedures to manage and care for houses.  Banks are not in the home ownership business.

After a bank has reached the point where it cannot wait any longer to cut its losses on the property, it can begin either a judicial process of foreclosure or, in some states, a non-judicial process.  In a judicial process, the mortgage bank files a lawsuit in the state courts making a claim for ownership of the property to satisfy debt owed in the form of back payments.  The bank must serve notice on any other person or company that has a security interest in the house.  That might be a second mortgage company, if there is one.  It might also be an individual, such as the former seller of the property if that person agreed to take payments over time from the buyer.  It might also include construction companies.  If a contractor does work on a house but does not receive payment for it, they can place what is commonly termed a mechanics lien on the house and must receive notice before the house is sold.

The court will ensure that the homeowner receives notice of the foreclosure suit, and the notice will usually include either a chance to pay what is owed or the opportunity to contest that the bank has the right to foreclose.  At the conclusion of the allotted time, and assuming that the homeowner has not paid the past due amounts, the court will enter an order of foreclosure.  Once the court enters the judgment, the lender will request an auction, usually performed under the authority of the sheriff.  The intent of the auction is to get the highest possible price for the property.  Once the house is sold at auction, the sheriff will forcibly remove the former residents, if necessary.

In those states that allow non-judicial foreclosure, the process might not start at the courthouse.  In those cases, after making demands for payment and not receiving it, the lender has the ability to draw up a deed of trust, which temporarily transfers the property to a trustee for the purpose of selling the house at auction.  As with the judicial foreclosure, the auction must be public and advertised.  After the auction, the ownership passes to the new owner.  Many states provide a mechanism for review by the courts to ensure that the process is not abused.

The exact time deadlines and procedures to be followed will vary from state to state.  The local courts usually have a short description of the process, and legal aid clinics might be able to provide free advice for people caught up in the process.