Understanding the Mortgage Foreclosure Process

Foreclosures are rising to tragic levels all across the U.S., and they're happening across the entire demographic spectrum. To avoid foreclosure, it's essential that homeowners first understand exactly what it is, why it happens, and how it can result in the loss of a home.

When you take out a home mortgage, you pledge the property to the bank as collateral against your loan. Once you stop making payments, however, the lender can legally take your house in exchange for the money that you owe. The process that the lender goes through to seize the house is known as foreclosure. For those who experience it, the event can be personally and financially devastating.

Play by the rules

Foreclosure rules vary from state to state, but generally speaking, the process unfolds as a series of legal events. The foreclosure can be stopped during the early phases, but only if the homeowner resolves all issues of delinquency by paying whatever is owed on the mortgage, plus any fees and penalties that may have accumulated from his neglect.

Five stages of foreclosure

The easiest way to understand foreclosure is to examine each stage of the process:

Step One: As soon as your monthly mortgage payment is late, the amount you owe increases because of penalties and fees. If the payment is not made by the deadline, an official letter is sent from the mortgage lender. Foreclosure is on its way to becoming a reality.

Step Two: Once you're delinquent, the legal office at the mortgage company begins to file papers to start foreclosure proceedings. You now have about 30 to 90 days at most to save your house from the auction block. The clock starts ticking.

Step Three: Talk to your lender. Try to work out some alternate payment plan that will let you avoid foreclosure. Lenders are eager to help, because when a mortgage company forecloses on a house, they typically lose about 50 percent of the value of the money that they loaned.

Step Four: A month or two after the first missed payment, the homeowner is given one last chance to remedy the situation. Foreclosure laws vary from state to state, but in most locales, the homeowner in this stage of the process has 30 days or less. When that time expires, the homeowner must vacate the premises. If he fails to do so, the sheriff will evict him.

Step Five: Meanwhile, legal notices are posted in public, to announce that the lender intends to sell the property at auction. Anyone can attend the auction, and the house is usually sold to the highest bidder. One of the most important things to remember is that there are only about 90 days from the time you miss that first payment until the day the auction gavel falls.

Prevention, of course, is the best medicine. That's why Congress is now demanding that lenders help to educate borrowers about such things as how to choose a mortgage loan or a refinance strategy that's appropriate, manageable, and affordable.