What Is Foreclosure?

If you fall far enough behind in your mortgage payments, you'll likely lose your home to a foreclosure. "Foreclosure" is the legal process that allows a lender, or the subsequent loan owner, to sell your property to satisfy the debt you owe.

Parties Involved in a Home Loan and Foreclosure

The key parties involved in most home loan transactions and foreclosures are:

• The borrower. The "borrower" is the individual (the homeowner) who borrows money and pledges the home as security to the lender for the loan. The borrower is sometimes called the "mortgagor."
• The lender. The "lender" originates the loan. Sometimes the lender is called the "mortgagee."
• The investor. An "investor" buys loans from lenders. Fannie Mae and Freddie Mac are, for example, investors.
• The servicer. The "servicer," which is the company you make your monthly payment to, handles the loan account. Often the servicer is a third party that manages the account on behalf of the lender or an investor for a fee. A servicer's duties include collecting and processing loan payments, as well as initiating and monitoring a foreclosure when a borrower stops making payments.

Home Loan Transactions: Terminology

Buying a home normally involves a large amount of money, so it's common for a buyer to take out a loan rather than pay the entire amount in cash. As part of a home loan transaction, a borrower typically signs two main documents: a "promissory note" and a "mortgage" (or "deed of trust").

The Promissory Note: Like an IOU

A "promissory note" is the document that contains a borrower's promise to repay the amount borrowed.

Mortgages and Deeds of Trust Give the Power to Foreclose

A "mortgage" or, in some states, a "deed of trust," is the contract that gives the lender the right to foreclose if the borrower doesn't make payments on the loan. When the lender records this document in the land records, it creates a lien on the home.

Endorsements and Assignments

Promissory notes are transferable, and banks often buy and sell home loans. When a loan changes hands, the promissory note is endorsed (signed over) to the loan's new owner.

The seller documents the transfer by recording an assignment of the mortgage or deed of trust in the land records.

How the Foreclosure Process Works

If you default on your loan by falling behind in payments or breaching the agreement in some other way, the servicer will probably refer the loan to an attorney or trustee for foreclosure.

Foreclosure works differently in each state, but the two basic types are judicial foreclosures and nonjudicial foreclosures. Usually, a foreclosure won't start until you're more than 120 days delinquent.

Right to Redeem and Deficiency Judgments After a Foreclosure

You own your home up until the foreclosure sale. So, you may legally stay in the property until this time.

In addition, depending on state law, you might be able to stay in the home until the redemption period expires or until some other action, such as ratification of the sale, occurs.

The Redemption Period

Some states have laws giving a foreclosed homeowner the right to regain ownership of the home, called "redeeming" the property, after a foreclosure sale by reimbursing the buyer for the amount paid at the sale or by repaying the full amount of the mortgage debt.

Deficiency Judgments

Sometimes, a foreclosure sale doesn't bring in enough money to fully repay the home loan. When this happens, the difference between the sale price and the amount owed is called a "deficiency."

In some states, the foreclosing party can get a personal judgment called a "deficiency judgment" against the borrower for this amount.

Stopping a Foreclosure

Depending on state law and your individual circumstances, you might have a defense against a foreclosure. A few potential foreclosure defenses include:

• you're entitled to protection from foreclosure under the Servicemembers Civil Relief Act
• the servicer didn't follow state foreclosure procedures
• the servicer didn't follow federal mortgage servicing laws, or
• the servicer made a serious mistake.

Talk to a Lawyer

While this article provides a general picture of how foreclosure works, laws vary from state to state. To get specific information about your state's foreclosure procedures and how they apply to your particular situation, consider talking to a local foreclosure attorney.