When it comes to real estate, the word ‘foreclosure’ is one of the most feared. But what is it?
A foreclosure is the legal process that allows a lender, most often a bank, credit union, or private mortgagor, to recover the amount that they have lent on a property in which the mortgagor has defaulted. A default is triggered when the mortgagor has missed a set number of payments as disclosed in their loan documentation.
Sometimes, a borrower also fails to meet other loan terms, which accelerates the foreclosure process.
The foreclosure process varies by state, but its legal basis is derived from either a mortgage or deed of trust contract. When a lender or mortgagee forecloses on a property, they take ownership of the property and then resell the property to recover their loss.
In general, the mortgage foreclosure process starts when a borrower misses at least one payment, and the mortgagee sends them a missed-payment notice. If the borrower misses a second payment, the mortgagee will take more serious measures by sending a demand letter. A demand letter is a formal document requesting payment on the default, however, at this point, the lender is likely still willing to work with the borrower to help them catch up on their payments.
After 90 days of missed payments, the lender issues a notice of default, and the formal foreclosure process begins. Typically, the mortgagee has 30 days to reinstate their loan from this period before the foreclosure process begins with the state. In 22 states, including Florida and New York, foreclosures take place through judicial foreclosure in which the lender must get permission from the courts to foreclose. In the other 28 states, including California and Texas, it’s a nonjudicial process called a power of sale. Power of sale foreclosures tend to be faster than judicial foreclosures as the lender does not need to go through the courts.
The amount of time it takes to foreclose on a property varies greatly by state. Some states can be quite swift and complete the process in approximately 200 days, while others can take over five years.
The long-term consequence of a foreclosure is that they appear on the borrower’s credit report and stay there for seven years after the date of the first missed payment. Most lenders will not give a mortgage to someone who has a foreclosure on their credit score.
Before you take your real estate exam, it is important to familiarize yourself with your state’s foreclosure process.
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