Foreclosure refers to a legal as well as a professional proceeding whereby a mortgagee or a lender gets a court order of cancellation of a mortgagor's equal right for redemption. Generally a lender gets a security interest out of a debtor who pledges an asset such as a house, in order to get a loan. In case of a borrower defaulting in payments, the lender may attempt to repossess the asset or property. However, the courts of equity have granted equitable right of redemption to the borrower in case the borrower pays off the debt. As long as this equitable right is in force, the lender cannot be assured of successful repossession of the property. So the lender decides to foreclose this borrower’s right of redemption.
In house mortgage loans, the process of foreclosure takes place when the creditor sells or repossesses a parcel of real, immovable property, subsequent to the owner failing to comply with the loan contract called a “mortgage” or “deed of trust”. In other words, after the completion of the process of foreclosure, the lender may sell that property and use the proceeds for paying off the mortgage or other legal costs.
Foreclosure – different types
Foreclosure can be initiated by the mortgage holder at a time which is specified in the documents. This can happen typically after a certain time gap subsequent to a default condition taking place. There are mainly two types of foreclosure that exist in the U.S and some other countries. These are:
• Judicial Foreclosure
• Foreclosure by power of sale
Judicial Foreclosure refers to selling of the property which is mortgaged under the court’s supervision. The proceeds, by priority go to take care of the mortgage and then to the other lien holders, and finally the borrower or mortgagor (if at all there are remaining any proceeds). A judicial foreclosure is announced subsequent to pleadings at a court hearing (either in a local court or a state level court).
Foreclosure by power of sale refers to selling of the property by a mortgage holder in the absence of court supervision. This is a speedier process than Judicial Foreclosure and may happen in states where a Deed of trust had been used in lieu of a mortgage.
Another minor form of foreclosure is strict foreclosure whereby a court brings the order to the defaulted mortgagor to pay the amount within a specified time limit, failing which the mortgage holder gets the property without any obligation for selling it. This form of foreclosure happens when the property’s value is less compared to the debt.
The concept of acceleration is used for determining the amount which is due under foreclosure. Suppose a borrower mortgages a property worth $10,000 and starts making monthly payments. Now in case the mortgagor defaults in payments, the mortgage holder may demand that the borrower should make good on the entire property amount, which is $10,000. This is acceleration.
Homeowners or borrowers may avoid foreclosure by refinancing, declaring bankruptcy or a short sale.