What’s a Foreclosure?

Dec 16, 2013

A foreclosure is the legal process where the mortgage company obtains ownership of the home that served as security for the mortgage loan (i.e., repossess the property). A foreclosure results when the mortgage company takes legal action against the homeowner who has failed to make payments and has defaulted or violated the terms of their mortgage loan.

There are two main types of foreclosure:

  • Judicial – supervised by a court with formal legal proceedings (civil law suit)
  • Non-judicial – non-court supervised

In both types of foreclosure, the homeowner receives the legal notice of foreclosure, the legal notice is published in the local paper (in most cases), and the home is generally sold at public auction. For judicial foreclosures, the borrower will generally be served with legal notice of the pending action, and the court will approve or set the foreclosure date and sale.

The process and timing of a foreclosure will vary according to the law of the state where the home is located, as well as the mortgage company’s policies. However, the mortgage company might begin preparing the default notice/foreclosure proceedings on the home as early as 30 days after the borrower has missed one payment. That’s why borrowers should take action early to begin working with the mortgage company to resolve payment problems immediately.

How To Avoid Foreclosure?

It’s important for the borrower to know the options and understand all the potential solutions that may be available to help avoid foreclosure. It’s also important to understand what can happen by failing to take action and foreclosure becomes unavoidable. The process can be stressful, embarrassing, and it can have long-lasting consequences.

Walking away from the home voluntarily may seem like the best solution when the home is valued lower than what is owed. However, this action may lead to financial consequences in the future. In some states, the borrower may be required to pay a portion of the mortgage debt even after the home has entered foreclosure. Also, the impact to the borrower’s credit may make it difficult to rent or purchase a home in the future. Borrowers should explore other options to avoid foreclosure with the mortgage company before making a decision to leave the home.

If this situation applies to you, keep in mind, your mortgage company doesn’t want to foreclose on your home. Just like there are consequences for you, the foreclosure process is time-consuming and expensive for them. They want to work with you to resolve the situation. However, some homeowners simply don’t take advantage of the help available and foreclosure becomes the only option.

The Bottom Line

A foreclosure can usually be avoided—even if a foreclosure notice has been sent out. See the chart below to compare some other options: Short Sale and Mortgage Release (Deed-in-Lieu of Foreclosure).

No matter the option, you should take action and contact your mortgage company about your situation as soon as you can.



Short Sale

Mortgage Release


How is home ownership transferred?

Voluntarily – if you are able to find a buyer and sell the home

Voluntarily – you transfer title back to the owner of the mortgage

Forced – public auction

Does the foreclosure stop?

Maybe – foreclosure stops only if you find an acceptable buyer for your home

Yes – foreclosure stops as soon as you transfer the deed/title

No – foreclosure continues and the property will be seized

Eligible for future Fannie Mae financing?

Yes – in as little as 2 years

Yes – in as little as 2 years

Up to 7-year waiting period

Relieved of outstanding first-lien mortgage debt?

Possibly – you may still be liable for some of your first-lien mortgage debt

Possibly – you may still be liable for some of your first-lien mortgage debt

No – you are liable for all of your first-lien mortgage debt

Get cash for relocation expenses?

Yes – up to $3,000

Yes – up to $3,000


Have time to transition out of your house?

Yes – but timing dependent upon sales contract/buyer

Yes – you may even be able to lease your home for up to 12 months!

No – little control over transition timeline with possible eviction

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  • Glossary

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