These days, you hear the word foreclosure all the time, on the news and everywhere. You may also know that it means losing your house when you are not able to pay the mortgage. But how many people know what really takes place during the foreclosure process? The actual foreclosure of property is the last step of quite a long process, in which the lender tries to recover his money.



Once a person has missed a payment, the lender sends a late payment reminder notice. If the homeowner ignores this notice and still misses another payment, yet another payment request is sent to them. If the homeowner still neglects to contact the lender, the lender can make a demand for a payment in full. This is stipulated under the Standard Acceleration clause, common to most mortgage contracts. At this point in the process, the homeowner owes the bank, not just the balance of the mortgage, but any late payment, legal fees and late fee penalty as well and this is the point where the formal foreclosure process begins.

The lender now sends a certified letter of foreclosure to the owner and then publishes a legal notice in the paper, notifying the public of the pending foreclosure. At this stage, a homeowner may still try to work out a payment plan with the lender, but unless ready to make the full payment, the lender may refuse to work with him. A court date is then set, and at the court, the homeowner, lender and any other party with financial interest in the property have to attend. The court issues the foreclosure to the lender and the lender, in turn, publishes the note of foreclosure and lists the auction date in the local paper. The homeowner can again try to work out a settlement with the bank at this stage or decide on a short sale to repay the outstanding dues.

Any member of the public can participate in the auction, but a prospective buyer must have a deposit check for the stipulated minimum amount, as well as financing arrangement ready if wanting to take over the property. At most auctions, the bank or the lender bids an amount large enough to cover the remaining costs, so unless the homeowner had a good amount of accrued equity in the house, the lender normally wins at the auction. If the winning party is someone other than the lender, after the auction has been closed, purchase contracts are signed between the auction winner and the lender and a closing date is set.

The money raised by the auction sale goes into real estate taxes owed and then mortgages and other liens and to creditors who have filed at the court hearing. In case there is any money left over after paying all these, it goes to the original homeowner. If the auction does not raise enough money to cover the mortgage, the homeowner continues to be held liable for the difference, as an unsecured debt. After the auction is a redemption period, varying from state to state, in which the original owner can try to buy back the house. The owner does not have to leave the house until the auction and the closing. The total process from pre-foreclosure to auction close varies depending on state laws, but generally lasts about six months.