First, the lender files a Notice of Default with the County Recorder or equivalent. They serve you with the Notice. You have a period of time ranging between 45 days to one year depending on the state to "cure" the deficit. This means you can either make up the missed payments or arrange for disposal of the home.

If you choose to make up the missed payments, you may have refinancing options with the bank. Sometimes, they will take the amount owed and make a separate loan for 24 to 36 months. Other times, they will add the missed payments to the end of the loan.

If you choose to dispose the home, you can sell it through the traditional means, do a short sale, or arrange for a Deed in Lieu of Foreclosure.

If you have equity in the home, you'll definitely want to pursue a traditional sale. You may also want to do a traditional sale even if you lose some money on the deal to protect your credit. Both the short sale and the Deed in Lieu options negatively affect your credit (but not as badly as a foreclosure does.)

A short sale is when you sell the home to an investor for less that the amount owed. The bank then accepts this as payment in full. In theory, everyone wins: the investor gets a home at a discount, you can walk away from a real estate mess, and the bank gets as much as they can from the property without the expense of foreclosure.

A Deed in Lieu of Foreclosure is similar except the deal is just between you and the bank. The bank accepts the deed to the house as payment in full for the mortgage and you walk away.

If you do nothing or are unable to work out a deal, the lender will foreclose and the house will be sold to the highest bidder at a sheriff's sale or auction. Depending on your state, you may have a Redemption Period where you can buy back the home for the auction price.

If you haven't left the home, you will be evicted by the new owner.

And that's the answer to how does foreclosure work.

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