The foreclosure process is often a lengthy, complex and emotionally draining process, where there really are no winners.
When a borrower takes a loan (typically to buy a house) from a lender (typically a bank), the bank insists on a collateral security for granting the loan. The borrower may provide the house being purchased as a collateral security; with the promise of repaying the loan amount through monthly installments. If the borrower ceases to repay the monthly installments, then the lender has a right to recover the money by selling the collateral security. The above situation where the lender takes action to recover the loan through the sale of the collateral asset is called foreclosure. Foreclosure is basically the legal proceedings initiated by the lender to recover the loan amount balance (along with interest and penalties) from a borrower (loan defaulter), by forcing the sale of the asset used as a collateral for the loan.
A lot of people harbor the myth that once the foreclosure notice is received, the home is lost permanently. Most banks follow a series of specified steps when initiating foreclosure proceedings against delinquent borrowers.
The foreclosure process is a 4-steps process:
1. Receiving the Notice for Missed Payment
When the borrower misses a monthly payment by the due date, then the bank initially sends a missed-payment notice, stating simply that the missed payment needs to be sent by a certain date to avoid further action.
Some banks offer a ten-day grace period to the borrowers from the due date of payment. If the payment is made during the grace period, then the bank does not initiate foreclosure proceedings, though this may certainly affect the borrower’s credit rating.
2. Notice of Default
If the payment is late by 30 days or more, then the bank may send a notice of default (NOD). The NOD includes information regarding the property in question, the borrower’s name, the amount which has not been paid, the number of days one is behind payment, a statement indicating the default status of the borrower and finally a copy of the mortgage deed signed when purchasing the home. The NOD may mention that if the amount is not paid immediately then foreclosure steps would be initiated.
3. Receiving the foreclosure notice
If the response to the NOD is not satisfactory, then the bank eventually sends a foreclosure notice. This notice informs the borrower that the bank has put in motion foreclosure proceedings and has scheduled the sale of the house or collateral security at an auction. The foreclosure notice also provides details regarding the total amount owed, the interest in percentage, the name of the bank and contact information of the bank’s attorney.
4. Foreclosure Sale
On the day of the auction the bank fixes a price covering the loan amount, interest and penalties accrued to the point. If nobody bids above this price then the bank becomes the default owner of the property, but if indeed some body quotes a bid higher than that fixed by the bank, then the bidder becomes the legal owner of the property.
Many Americans have had to go through this dreaded foreclosure process in the aftermath of the Sub-prime crisis when the property bubble burst. Heart wrenching scenes were witnessed on TV, as families were evicted from their houses due to foreclosure proceedings. If you are in fear of foreclosure speak to a real estate professional to find out if the value of your home is greater than the amount borrowed. There may be hope.