CHAPTER 3

Foreclosure Overview

A foreclosure is the legal process by which an owner's right to a property is terminated, usually due to default. It typically involves a forced sale of the property at public auction, with the proceeds being applied to the mortgage debt. Put in other words, it is a legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage - also known as repossession of a property. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Lis Pendens. The foreclosure process can end in several ways, such as:

• The borrower pays off the remaining amount during a grace period decided by the state. This grace period is also known as pre-foreclosure.
• The borrower sells off the plot during this foreclosure period. The money that comes from the sale helps the home owner to pay back the remaining amount, thereby preventing a history of foreclosure from appearing on their credit report.
• If the owner is not able to sell the property he goes into foreclosure. The lender takes up the property with the intention of selling it off to get back the default amount. A third party can then buy the property from a public auction. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction. They are also known as bank-owned or REO properties (Real Estate Owned properties by the lender).

Most of the time, home owners prefer paying for their homes through loans as they find paying off a large amount in a single payment is too difficult. They approach an institution such as a bank that offers mortgage loans at a reasonable rate. The story does not end here. The situation gets a bit tougher when the borrower is not able to pay the mortgage off on time. This may occur because of a job loss or some kind of crisis may exist. However the mortgage lender offers a relaxation period hoping that the borrower will be able to make the payment. If the borrower is still not able to pay, then the lender realizes that this is not a win-win situation. The only option for the lender to recover their loan is by foreclosure. Having to pay off a large mortgage amount is not at all an easy task, and having to face foreclosure is a very difficult circumstance.

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