What is bank foreclosure?

by Miranda Marquit, Contributor

One of the realities of homebuying is that you usually need to borrow the money to buy a house. Most people cannot afford to pay upfront cash for a home, and that means they will have to borrow money from a bank (or other lending institution) to provide the capital for the purchase. The borrower then pays back the loan over a predetermined period of time (typically 15 to 30 years) with interest.

Unfortunately, part-way through the loan term, some borrowers find that they are no longer able to make their mortgage payments. This could be due to a major financial setback (such as job loss or unanticipated medical expenses) or because their mortgage terms were automatically modified (as happens with adjustable-rate mortgages) resulting in higher monthly payments that are now unaffordable. In any case, if the borrower defaults on their loan, the mortgage lender has a right to initiate a bank foreclosure on the property.

Bank Foreclosure: What It Is

Bank foreclosure is a legal process. During a foreclosure, the bank/lender is able to terminate the borrower’s entitlement to the “equitable right of redemption.” This can be done because buying a house with a mortgage loan means you are securing the debt with your home. Since the home is collateral for the loan, the lender may utilize bank foreclosure to recapture the property when a borrower fails to make mortgage payments.

Normally, bank foreclosure takes several months to finalize. Since there is a certain process to follow from beginning to end, a foreclosure can take anywhere from three months to over a year. In general, the bank foreclosure process begins as soon as the borrower misses a few months of payments. The lender will send notices asking the borrower for payment. In some cases, a borrower and lender may be able to reach an agreement to modify or refinance the loan so that bank foreclosure can be avoided.

If the default notices are sent but still no payments are made, the bank foreclosure process will pick up speed. In an attempt to recover their losses, the bank will most likely try to put the property on the market. Often times, lenders will sell these homes (for reduced prices) at bank foreclosure auctions to recoup what they can.

Depending on the particular state laws, a bank foreclosure may be overseen by a court. However, not all states require the judiciary to get involved. It is also worth noting that bank foreclosure is not the only type of foreclosure. Even if your mortgage is paid-off, you could be susceptible to foreclosure if you have any unpaid tax liens or overdue homeowners association (HOA) fees.