You hear the word 'foreclosure' all the time in the news. You know it means that you lose your house because of not paying the mortgage. But do you know what actually happens during the foreclosure process? Foreclosure is actually the last step of a long process where the lender tries to get their money. It starts with pre-foreclosure. Once a person misses the first payment, the lender will send a late payment notice. If the home owner then ignores this notice and misses another payment without contacting the lender, another payment request will be made. If the homeowner still does not contact the lender, the lender may then make a demand for payment in full. This is stipulated in your mortgage under the acceleration clause, which is in most standard mortgage contracts. Not only will the home owner owe the balance of the mortgage, but any late payments, legal fees and late fee penalties. Once the acceleration clause has been evoked, the bank will not accept anything other than full payment and the formal foreclosure process begins.

The lender will now send a certified letter of foreclosure to the home owner. This may be served by a processor or by the local sheriff. The lender will then publish a legal notice in the paper of the pending foreclosure (subject to local laws). At this time, a home owner can try to work with the lender, but unless they have full payment, the lender may not work with them at all. A court date is set, at which time the home owner, lender and any other party with financial interest in the property will attend. The courts will then issue the foreclosure to the lender. The lender then publishes the note of foreclosure and lists a date for the auction in the paper. The home owner again can try to work a settlement with the bank at this time.

Then the auction date arrives. This can be called an auction, sheriff's sale or foreclosure sale. Anyone can participate in the auction; however, one would need to have a deposit check for the stipulated minimum and financing lined up to take over the property. At most auctions, the lender will bid enough to cover their remaining costs on the property, so unless the home owner had a good deal of equity in the house, the lender will normally win the auction. After the auction is closed, purchase contracts are issued between the auction winner and the mortgage lender. If a party other than the lender is the highest bidder, a closing date will then be set.

Money from the auction sale goes from first priority to last. First are always real estate taxes owed, then mortgages, then other liens and creditors who filed at the court hearing. If there is any money left over, that will actually go to the original home owner. If there is not enough money from the auction to cover the mortgage, the original home owner is responsible for the difference, although it is now unsecured debt, since they no longer own the house. After the auction, there is normally a redemption period (which varies from state to state) during which the original owner can buy back the house if they can get financing. During this time, the home owner does not have to leave the house until the auction is finished and the closing has happened. If the home owner still has not left, then the new owner can file evictions. The process from pre-foreclosure to auction close is normally around six months.

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