I'm often asked "how does foreclosure work?" by distressed homeowners. They want to know whether they can save their home and what to do if they can't. So, when people ask me how does foreclosure work, I let them know that it's a process - a legal process. The lender has to go through a series of steps to make the foreclosure legitimate in the eyes of the law.

First comes the Notice of Default which puts you and the system on notice that the lender is proceeding against you. The lender must serve this paper on you. Depending on the state, they may be able to mail it to you.

This starts the clock ticking for saving the house. You may have weeks or you may have a few months - depending on the state. During this time you can:

? Make up the missed payments and resume the mortgage

? Renegotiate the mortgage

? Do a short sale

? Turn in the house in a "Deed in Lieu of Foreclosure" situation

? File for bankruptcy in an attempt to reorganize your debts

? Do nothing and wait for the foreclosure axe to fall.

All of these options are choices sensible people make.

If making up the missed payments is a possibility, this is almost always the best option. However, most people don't have the ability to do this.

Banks are increasingly open to renegotiating the loan. This takes several forms. It can mean adjusting the interest rate, especially in an exploding ARM situation. The bank may also be willing to work with you in financing the missed payments if you are able to show them you can make the mortgage payment on a monthly basis in the future.

But often, it doesn't make any sense to stay in the house. If you're upside down, can't afford the monthly payments, or are forced to move and cannot sell the house under a normal real estate contract, you may want to consider a short sale. A short sale is where you sell the home for less than the amount owed and the bank approves the sale price as payment in full.

A similar option is to turn the house over to the bank in a "Deed in Lieu of Foreclosure." The bank accepts the house and you walk away without foreclosure.

Both short sales and Deeds in Lieu show up negatively on your credit report, but are not nearly as bad as foreclosure.

Some people who ask me how does foreclosure work are considering bankruptcy. I tell them to proceed with caution. Bankruptcy allows you to eliminate or modify consumer debt and may help put you in a position to save your house. But, if you fall out of Chapter 13 bankruptcy, you will have both a foreclosure and a bankruptcy on your record. Ask your bankruptcy attorney about the consequences of falling out of foreclosure before you proceed with this option.

The last option is to stay in the home and let foreclosure take its natural toll. If you do this and save the amount you would be paying, you may have a nest egg to start anew after foreclosure.

If you do nothing, the bank will foreclose and the house will be sold at auction. Some states have a redemption period where you can buy your house back. After this, if you have not moved out, the new buyer will evict you.

That's the short answer to how does a foreclosure work.

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