“Foreclosure” is a commonly used word, both in the news and in public discourse. It means that someone has lost their house because they have not paid their mortgage. However, what really happens during the foreclosure process is unknown to many people. Foreclosure is actually the last resort of a lender who has already gone through a long process to try and get their money. The first step is “pre-foreclosure”. This is simply a late payment notice, sent when the person misses their first payment. If that notice is ignored and the homeowner still has not paid, another reminder will be sent that a payment is due. If this second notice still goes unheeded and the homeowner does not attempt to contact the lender, the lender may demand the entire payment. This process is outlined in the acceleration clause of most mortgage contracts. Now, the homeowner will owe the lender the entire balance of the mortgage, plus late payment fees, legal fees and other penalties. After this clause has been applied, the bank will only allow the homeowner the full payment. Then the real foreclosure process is set in motion.

The first step in the formal foreclosure process is a letter sent from the lender to the homeowner. This can be delivered by a processor or a member of the local police department. Then, a legal notice of the foreclosure will be published in the paper by the lender (in accordance with any local laws). The homeowner has another chance to work with the lender, but if the homeowner does not have the entire amount owed, the lender may refuse to even speak with them. Next, the homeowner, lender, and anyone else involved financially in the process will attend a court hearing. Afterwards, the courts will issue the formal foreclosure to the lender. The lender will publish the notice plus a date for an auction in the paper. This is also the last chance the homeowner will have to settle his accounts with the bank.

When the date of the auction (also called a sheriff’s sale or a foreclosure sale) arrives, anyone may bid, but whomever bid would have to be prepared with a deposit check for the minimum financing required to take over the property. Most times, the lender will win the auction because they will bid enough to cover the remainder of what is owed to them on the property. Unless the homeowner had a lot of equity invested in the house, the lender will win. After the auction is over and bidding is closed, legal purchase contracts are granted between the winner and the lender– and if someone other than the lender wins the property, a closing date will be set.

The money from the auction becomes the least important thing. The first priorities now are any real estate taxes, mortgages, liens or other creditors or anyone else present at the court hearing to whom monies are owed. Any money left over will belong to the original homeowner. If the auction does not generate enough money to repay the mortgage, the original homeowner pays the difference (but since they don’t own the house anymore, it is an unsecured debt). After the auction, there is a period of time which varies from state to state called the “redemption period”, where the homeowner can buy back the property. The homeowner is not required to leave the house until the auction is closed, but if they are still there afterwards, the new owner can have them evicted. The entire process, from pre-foreclosure to auction close, is usually about six months.