Foreclosures happen when a person fails to make payments on a loan secured against a property and the lender takes possession of the collateral— usually a home— to recover its loss. It is a complex process that takes time and money to complete, and it can have a huge impact on a person financially and emotionally. Understanding the foreclosure process is key to making sound financial decisions and knowing your rights.
Defaulting on a loan can be a stressful and frightening situation, as it means the lender has the legal right to take back the borrower’s collateral (i.e. their home). In order to reclaim the collateral, the lender will usually issue the borrower with a Notice of Default. This Notice of Default informs the borrower that the loan is now in default and issues a certain amount of time, usually between 30 and 90 days, for the borrower to make up the missed payments or face foreclosure. If the bills are not paid within this time frame, the lender will proceed with the foreclosure process.
If the borrower is unable to make the missed payments and bring the loan current within the set time period, the foreclosure proceedings will move to the next step. Usually, this is a Notice of Sale, which informs the public of the date the property will be sold at an auction. If the borrower is still unable to make the payments, the property will then be sold at the auction. The winning bidder will assume ownership of the property and the prior owner must vacate the premises within a certain amount of time, typically 30 days.
The foreclosure process continues with an auction of the foreclosure property. After the Notice of Default period has passed, the bank will usually publish a Notice of Sale to inform the public that the property is going to be auctioned off at a certain time. This public auction is for the purpose of allowing investors to bid on the property. If the home is purchased, the remaining loan balance is either paid in full or retained by the bank if only a portion of the loan was covered by the sale.
If the home is not sold at the foreclosure auction, the home returns to the bank who will then own it. This type of foreclosure is known as “real estate owned” or REO. The bank will then list the home on their books as an asset and may work with a real estate agent to sell the home.
The foreclosure process can be confusing and emotionally overwhelming. It’s important to keep in mind that there are options available to struggling homeowners to avoid foreclosure. Homeowners should contact their lender immediately if they are having trouble making payments and inquire about loan modification or other assistance programs. It’s also important to seek out reliable financial advice and resources to ensure that the best decisions are made with respect to the estate.
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