The decision to buy a home is one of the biggest financial decisions you will make. It is important to understand what you need to know to avoid foreclosure .

Even making such a financially responsible decision often requires precise knowledge. It is important to understand what can happen if something goes wrong and you can no longer pay your mortgage, leading to a foreclosure.

Foreclosure

What is a foreclosure?

Put simply, a foreclosure is when a mortgage lender takes ownership of a property because of missed mortgage payments. For example, if a person falls behind on their mortgage payments - meaning they haven't paid the lender interest or principal for a certain period - they lose the right to pay back a pledged asset. That property is usually awarded to the mortgage lender - normally a bank - which then takes possession of the property. After a foreclosure is completed, the homeowner can be vulnerable to damage to their credit.

Types of foreclosure

There are two types of foreclosure, known as judicial and non-judicial.

Foreclosure
  • Judicial foreclosure: This occurs when the lender notifies the borrower of missed payments and the borrower does not cure the default. The lender then files a lawsuit against the owner and a lis pendens is filed with the recorder's office. The case is a matter of public record, and after the trial the property is usually sold at a public auction.
  • Non-judicial foreclosure: This occurs when the lender holds a power of sale that can be exercised if the borrower defaults. With this type of foreclosure you also receive a notice of default, which is recorded at the county recorder's office, and you are given a certain period to make up the missed payments. The difference with this type of foreclosure is that the lender notifies you of the sale of the property and is then able to sell the property at an auction or list it on the Multiple Listing Service if you don't catch up on the payments.

Foreclosure process

The first stage of foreclosure is known as pre-foreclosure. This happens on average three to six months after a payment default. At this point, the lender notifies the borrower that there is a risk of foreclosure. During this time, homeowners can either catch up on the missed payments or work with investors to negotiate a deal in which the investor takes over the mortgage at a mutually agreed price.

If the missed payments can't be fixed, the homeowner receives a notice of sale. How this phase plays out depends on whether it is a judicial or non-judicial form of foreclosure. In the final phase, the property is reassigned either to the lender or to an investor who bought the property at auction.