Foreclosure
Foreclosure is the legal process by which a lender takes ownership of a property when the borrower fails to make mortgage payments, typically after several months of default.
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Exam Tip
Judicial foreclosure = through courts. Non-judicial = faster, uses power of sale clause.
What is Foreclosure?
Foreclosure is the legal process a lender uses to recover the balance of a loan from a borrower who has stopped making payments. The lender takes ownership of the property and typically sells it.
Foreclosure Timeline
| Stage | Timeline | What Happens |
|---|---|---|
| Missed Payments | 1-3 months | Late fees, collection calls |
| Notice of Default | 3-6 months | Formal warning |
| Pre-foreclosure | 3-10 months | Last chance to cure default |
| Auction/Sale | Varies | Property sold at auction |
| Eviction | After sale | Owner must leave |
Types of Foreclosure
| Type | Process | States Used |
|---|---|---|
| Judicial | Through courts | Most states |
| Non-Judicial | Outside courts (faster) | Deed of trust states |
| Strict Foreclosure | Lender takes title directly | Few states (CT, VT) |
Alternatives to Foreclosure
| Option | Description |
|---|---|
| Loan Modification | Change loan terms to lower payment |
| Forbearance | Temporary payment pause |
| Short Sale | Sell for less than owed (lender approves) |
| Deed in Lieu | Voluntarily transfer deed to lender |
| Refinance | Get new loan to pay off old one |
Impact of Foreclosure
- Credit Score: Drops 100-160+ points
- Credit Report: Stays for 7 years
- Future Loans: Difficult to get mortgage for 3-7 years
- Tax Implications: Forgiven debt may be taxable
- Deficiency Judgment: May owe remaining balance (some states)
Deficiency Judgment
If the property sells for less than the loan balance, the lender may sue for the difference in some states.
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