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Foreclosure Overview
Foreclosure is when a lender takes possession of a home because the homeowner defaults on their mortgage payments. Once foreclosure is complete, the home becomes the property of the lender.
Generally, before initiating foreclosure proceedings, a lender must send the homeowner a notice of default. This is usually done after 3 months of non-payment. The notice usually states that the homeowner has been delinquent in his or her payments, and contains a threat to repossess the home.
If the homeowner continues to not make payments, or establish a new agreement the lender, the lender will initiate a foreclosure proceeding. In these proceedings, all the lender has to prove is the existence of a mortgage, and that the homeowner is delinquent in payments.
Once the house is foreclosed, the lender will usually sell it at auction to try to recoup their losses. If the house fetches less than the lender is owed, the homeowner may have to pay the difference, called a deficiency judgment.
While the lender has a legal right to seek repayment of a loan, and will enforce this right aggressively, the homeowner still has some protections. These protections include:
- Equity of redemption: the homeowner has a right to pay off the balance of the loan, if possible, before the home is foreclosed.
- Public notice of foreclosure sale: the public must be notified that the house is being auctioned off. This increases the likely number of bidders, which increases the price that the home is likely to fetch, making a large deficiency judgment less likely.
- The homeowner's right to bid at the foreclosure sale: this gives the homeowner one last chance to buy back the home from the lender. It also increases the chance that the house will fetch fair market value.
- Judicial supervision of price: if the lender bids low at a foreclosure sale, then resells at a very high price, the homeowner may be entitled to a share of the excess profits.
- Right of redemption: this is similar to the first protection listed above, but it applies after the house has already been foreclosed. It gives the homeowner a limited period of time to pay off the debt after foreclosure has become final.
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