Foreclosure Explained
What is foreclosure?
Foreclosure is a way for lenders to recoup the value of a loan by selling or repossessing the property. It is a legal proceeding involving the courts and varies somewhat from state-to-state.
How it works.
The foreclosure process begins when a borrower defaults on a loan by missing payments. Typically, a lender will send the borrower a formal demand for payment, sometimes called a Notice of Default. If the lender and the borrower cannot come to an agreement (see Avoiding Foreclosure), then the lender continues the formal foreclosure process.
Two types of foreclosure.
Most commonly, the home is sold at auction and the proceeds from the sale go first to the lender, then to any other lien-holders (such as contractors, or secondary lenders in the case of home equity loans), and finally to the borrower. This method is preferred since it protects any equity the borrower might have in the property. It is important to note that properties sold at foreclosure auctions typically sell at less than market value.
In a few states, the law allows a “strict foreclosure.” In this instance, the lender is automatically granted the title and possession of the property and the borrower is evicted.
Why you need to know.
If your home goes into foreclosure it can deal a serious blow to your credit history. It can lower your credit score by up to 280 points. A foreclosure tells lenders that you have been unable to meet your debt obligations in the past, which can also impact other areas of your financial life, such as requests for credit cards, car loan applications, even your ability to get a job. And since foreclosure stays on your credit report for at least seven years, the effects of foreclosure are long lasting.
For foreclosure help, read our article Avoiding Foreclosure for tips.
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