Foreclosure is a legal process that results from a borrower defaulting on their mortgage payments. In this process, the lender attempts to get the rest of their money by selling the property set as collateral (usually a house).
Types of foreclosure
1. Judicial foreclosure
This involves selling of the mortgaged property and using the proceeds to pay the mortgage. This is all done under the supervision of a court and is usually initiated by the lender.
2. Non-judicial foreclosure
Non-judicial foreclosure is only applicable when there is a power of sale clause in the mortgage or deed of trust used. This makes it possible for the lender to sell the property once the borrower defaults without the supervision of any court.
3. Strict foreclosure
This type of foreclosure is rarer than the previously mentioned ones. It is only available in a few states and involves a court case. If the lender wins the court case, they are given the right to seize the collateral property without being obliged to sell it. It is usually applicable when the value of the debt is higher than that of the property.
The foreclosure process
Although the process of foreclosure varies from state to state, it usually starts when a borrower is unable to make their mortgage payments for a period of six to eight months. At this point, the lender has the right to file what is known as a Notice of Default at the county recorder’s office.
At this point, the borrower is granted a grace period known as pre-foreclosure. This gives them a period of about 30 to 120 days to clear their payments. Failure to do so leads to seizing of the collateral property and its auctioning.
Reasons why a borrower would opt to stop their mortgage payments
Apart from obvious financial difficulty, there are other reasons someone may default on their mortgage payments. For instance, the borrower may be tired of managing the property. Also, they may discover that the property’s value has decreased to a level that it is lower than that of the mortgage.
The right of redemption
In some states, it is possible to get back property that has been foreclosed. This is through what is known as the right of redemption. This involves paying the lender all that you owe them or paying the new owner of the property the price which they paid for it.
Another way of dealing with foreclosure is to issue a claim against the lender and sue for damages.