How a foreclosure works - By: Paul Escobedo

When a home is purchased, the bank or financial institution (usually a lender) holding the mortgage has taken a security interest in the property. If the homeowner does not fulfill his / her end of the mortgage agreement, usually because of missed payments, the security interest allows the lender a right to regain the money that is owed on the property. The legal process the lender will use to regain the money by selling the house through a public auction or traditional methods is called a foreclosure.

A foreclosure moves through three stages: pre-foreclosure, foreclosure, and the foreclosure auction. The pre-foreclosure stage is when the homeowner defaults on the mortgage through missed payments and the lender files a public Notice of Default. During the foreclosure stage, the process becomes official when the lender files a public and legal notice of foreclosure with the county Record’s Office. Soon after, the court will grant the lender a foreclosure and set a date for public auction of the property. The third and final step of the foreclosure process is the foreclosure auction, also called the trustee sale. At an auction the property is awarded to the highest bidder, a contract issued by the lender and a closing date on the property is set.

Although there is an auction, this does not necessarily mean the property is sold. Many times the lender will set a minimum price for the house which will not be met by the bidders. In this scenario, the lender will take ownership of the property and it becomes Real Estate Owned (REO) in an attempt the sell the house using traditional methods.

For a homeowner, a foreclosure presents a host of issues. The most important thing to remember is that a foreclosure will crush a homeowner’s credit score dropping it close to 300 points. Also, if the lender does not regain the full market value on the property, the lender can attempt to pursue the homeowner for the money utilizing the IRS.

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