Foreclosure is the legal process by which a lender (usually a bank or financial institution) takes possession of a property due to the borrower's failure to repay a loan. It usually happens when the borrower has defaulted on mortgage payments. The lender then sells the property to recover the remaining loan balance.
Key Features of Foreclosure:
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Default on Loan Payments: Foreclosure typically occurs after the borrower has failed to make a certain number of mortgage payments, typically three to six months.
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Legal Process: It involves a legal process in which the lender files a suit to repossess the property and may result in the public auction of the property.
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Reclamation of Debt: The lender seeks to recover the unpaid loan balance by selling the property.
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Auction or Sale: The property is often sold at an auction, and the proceeds are used to repay the outstanding loan.
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Effect on Borrower: Foreclosure can have serious consequences for the borrower, including damage to their credit score and the loss of the property.
Types of Foreclosure:
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Judicial Foreclosure: The lender must file a lawsuit in court to obtain a judgment to foreclose on the property.
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Non-Judicial Foreclosure: In certain states or countries, the lender can foreclose without going to court if the mortgage agreement includes a "power of sale" clause.
Example:
If a homeowner takes out a mortgage to purchase a home but fails to make payments for several months, the bank can begin foreclosure proceedings to reclaim the property.