How Foreclosures Work

By: Charles W. Bryant

The Foreclosure Process

A Dumpster is filled with furniture and personal property in front of a vacant home in October 2007 in Antioch, Calif. California ranks third behind Ohio and Michigan ­in foreclosures.
A Dumpster is filled with furniture and personal property in front of a vacant home in October 2007 in Antioch, Calif. California ranks third behind Ohio and Michigan­in foreclosures.
Justin Sullivan/Getty Images

The foreclosure process differs by state, but we can take a look at the general steps that are taken. If you're faced with foreclosure, it's important that you research your state's laws and practices.

Foreclosure proceedings can begin after a single missed payment, but it isn't very likely. Most banks and lenders have a grace period for late payments, usually with a fee added on. It typically takes being a full 30 days late for the alarm bells to go off. After the second missed payment, you'll be getting some phone calls. Many lenders will only accept both late payments to bring the loan current. They also may refuse any partial payments.


Once you fall three months behind, things get serious. This is typically when most lenders will begin the foreclosure process in one of two ways: judicial sale, which requires that the process go through the court system, or power of sale, which can be carried out entirely ­by the mortgage holder.

All states allow judicial sale, while only 29 allow power of sale. If your state allows power of sale, the loan papers will usually have a clause that says this method will be used. Power of sale is typically faster than the judicial route. Let's look at both methods.

Judicial sale:

  • The mortgage lender will file suit with the court system.
  • You'll receive a letter from the court demanding payment.
  • Typically, you'll have 30 days to respond with payment to avoid foreclosure.
  • At the end of the payment period, a judgment will be entered and the lender can request sale of the property by auction.
  • The auction is carried out by the sheriff's office, usually several months after the judgment.
  • Once the property is sold, you're served with an eviction notice by the sheriff's office, and you must vacate your former home immediately.

Power of sale:

  • The mortgage lender will serve you with papers demanding payment.
  • After an established waiting period, a deed of trust is drawn up that temporarily conveys the property to a trustee.
  • The trustee will sell the house at public auction for the lender.
  • Many times, these foreclosures are subject to judicial review to make sure everything was carried out legally.
  • There is usually a requirement for the lender to post a public notice of sale for the auction.

Both types of foreclosure require that any other involved parties be notified of the proceedings. For instance, if the homeowner took out another loan against the house with a third party, that lender must be contacted and its loan amount must be paid from the auction's proceeds. If the third-party lender isn't paid, it can apply the mortgage to the new property owner. Many times, the lender will actually buy the property back and attempt to sell it through the real estate market at a later date.

There can also be deficiency judgments made against the borrower if the sale of the property doesn't satisfy the amount of the loan. The entire difference between the two can be required, although some states only require that difference between the fair value of the property and the loan amount be paid.

There's one more type of foreclosure that's almost completely obsolete, called strict foreclosure. In these cases, once judgment is made on the lawsuit, the property is automatically assumed by the mortgage holder. Only Connecticut and Vermont still allow this practice [source: Realty Trac].

In the next section, we'll give you some tips to help you avoid foreclosure.